Before I get into this post, I’m happy to say I’ll be a panelist at The Microcap Conference, a new conference taking place in Philadelphia on November 5. It will be a great opportunity to hear from some promising small companies, meet with company management, and network with other analysts and investors. Anyone interested can find more information at microcapconf.com.

Fair warning: my subject today is so thinly-traded that building a meaningful position is next to impossible. So, I present the situation mainly as a profile in corporate gamesmanship, of multiple competitors sparring to achieve complete control over a valuable asset. The asset in question is a real mouthful: Warrnambool Cheese and Butter Factory Company Holdings Limited.

“WCB” is Australia’s oldest dairy company, founded in 1888. From the very beginning, WCB was export-oriented, first sending a shipment of butter to London in 1893. The company grew by leaps and bounds in the 20th century, overcoming a disastrous fire in 1929 and forming many joint ventures and licensing agreements with major world cheese and dairy brands. Over time, the company’s footprint increased to encompass many different categories of dairy products, as well as many supply chain inputs. The company listed on the ASX in 2004.

Dairy prices can be volatile and WCB’s results are not immune, but on average the company has been profitable. Here are annual results from the company’s listing in 2004 to fiscal 2014.

Like I said. Hardly consistent, but generally profitable and moving in the right direction. Over this stretch, WCB caught the eye of other Australian dairy businesses looking to expand. WCB’s international distribution and valuable partnerships were enticing for other operators looking to achieve higher margins through increased scale and improve their market share.

The first company to propose an outright acquisition of Warrnambool was Murray Goulburn, an Australian dairy co-op. Murray Goulburn approached WCB in late 2009 but was rebuffed. The WCB board viewed the proposal as opportunistic, and to a degree it was. WCB suffered heavily amidst the global financial crisis, and 2009’s results were very poor. Though Murray Goulburn would raise its offer multiple times, they were repeatedly turned down and ultimately withdrew their offer in June, 2010. Still, they began a creeping takeover of WCB, announcing they had purchased nearly 5% of WCB’s shares in early 2010. Through continued purchases, Murray Goulburn increased its stake in WCB to just under 10% by late 2010. WCB, for its part, brought in another competitor as a substantial shareholder. Through a rights offering, Bega Cheese purchased a 15% interest in WCB.

The games would continue, with various competitors quietly building their stakes in WCB. By mid 2013, Murray Goulburn had built its ownership to 16% of WCB, and Bega held 17%. Bega was the next to attempt to acquire WCB, offering the equivalent of $5.78 in cash and Bega Cheese stock. Again, WCB’s board recommended against the offer. Finally, after nearly a year of warring press releases and attempts to rally shareholders for or against the deal, Warrnambool found itself a savior in a white knight: Saputo, Inc. The large Canadian dairy company stepped in with a superior offer of $7.00 per share, payable in cash.

However, Bega Cheese and the Murray Goulburn Co-Op were far from done. Murray Goulburn returned with a bid of $7.50 per share, while Bega Cheese maintained that its offer was superior in that it allowed WCB shareholders continued participation in an Australian dairy company. Saputo fired back with an improved offer of $8.00. Meanwhile, a previously unknown player crept in and began accumulating WCB shares in earnest. On October 29, 2013, Lion Dairy went on a massive buying spree and bought up 9.99% of WCB’s shares outstanding. Lion Dairy is a subsidiary of Japanese beverage giant Kirin Holdings. Lion Dairy had long had a partnership relationship with WCB, and now had a substantial financial investment as well.

On and on it went, with the three bidders increasing their bids in turn. Murray Goulburn’s offer would eventually reach $9.50 per share. Meanwhile, Saputo took matters into its own hands and began buying WCB shares aggressively. In the end, it was Saputo that won out. Bega Cheese capitulated and sold its holdings to Saputo and Murray Goulburn did the same. Through its various open market purchases and the takeover offer, Saputo managed to increase its ownership of WCB to 87.92%.

That might be the end of the story, were it not for Lion Dairy. One of Saputo’s explicit goals in offering to purchase WCB was to obtain a shareholding of over 90%. Saputo even offered an additional 20 cents per share if its offer succeeded in achieving 90% ownership. Why is the 90% threshold a big deal? Well, under Australian corporate law, a purchaser can force remaining shareholders to sell if the purchaser can achieve 90% ownership. Lion Dairy’s stake is now just over 10%, and it represents a blocking interest than prevents Saputo from taking full ownership of WCB. It also prevents Saputo from delisting WCB from the Australian stock exchange, forcing them to continue paying additional listing and auditors fees.

In essence, what Lion Dairy now possesses is a valuable intangible asset via its ability to prevent Saputo from fully achieving its goals. If Saputo wants to achieve complete ownership of Warrnambool, it will likely have to pay Lion Dairy (and all remaining minority shareholders) a premium for the remaining shares. The companies are not exactly adversarial at this point (witness the recent transaction where Lion Dairy sold an entire division to WCB) but Lion Dairy and Kirin Holdings are certainly aware of the strength of their position. Saputo cannot force a merger, nor can it delist WCB, nor can it directly dividend cash back to Saputo without sending 10% of it to Lion Dairy.

Perhaps Saputo will play a waiting game. If a recession rolls around, Lion may become more willing to sell its blocking interest to Saputo at a lower price. On the other hand, Lion Dairy’s asking price may only increase if WCB does well under Saputo’s ownership. Warrnambool Cheese and Butter recently traded at just under Saputo’s acquisition price. Anybody interested in aligning with Lion Dairy and taking part in the next round of corporate soap operatics might enjoy owning a few shares just for the entertainment value, with upside if WCB’s operations perform well. But purchase carefully. Warrnambool’s stock may be one of the world’s most closely-held listed companies, with a free float of less than $6 million on a market capitalization of $522 million.

Alluvial Capital Management, LLC does not hold shares of Warrnambool Cheese and Butter Factory Company Holdings Limited for client accounts. Alluvial may buy or sell shares of Warrnambool Cheese and Butter Factory Company Holdings Limited at any time. 

OTCAdventures.com is an Alluvial Capital Management, LLC publication. For information on Alluvial’s managed accounts, please see alluvialcapital.com.

Alluvial Capital Management, LLC may buy or sell securities mentioned on this blog for client accounts or for the accounts of principals. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at info@alluvialcapital.com.