An independent expert has endorsed Canadian dairy giant Saputo's proposed $1.3 billion takeover of troubled Australian dairy processor Murray Goulburn, saying the offer is fair and reasonable.
An assessment by advisory firm Grant Samuel has concluded that a sale to Saputo is in the best interests of Murray Goulburn's suppliers and unit holders because it preserves its assets - especially milk supply - from further deterioration.
"In Grant Samuel's opinion, a stand-alone strategy that aimed to preserve an independent Murray Goulburn would involve unacceptable risks," Grant Samuel said in its report.
"There would be a real prospect of further milk losses taking Murray Goulburn past a tipping point that would precipitate loss of financier support and wholesale destruction of equity value."
Murray Goulburn's fortunes have soured since April 2016, when the co-operative unexpectedly slashed the price it paid farmers for their milk.
That caused chaos across the whole sector and prompted many suppliers to quit the industry or shift to other processors.
The co-operative's ability to pay a competitive farmgate milk price to secure its milk supply has been constrained by its high debt level.
Since April 2016, Murray Goulburn has lost 45 per cent of its milk intake.
Murray Goulburn believes that the sale to Saputo will ensure a competitive milk price for suppliers and maximise value for shareholders.
Grant Samuel said theoretical estimates of Murray Goulburn's value were uncertain, but the competitive nature of the process under which Murray Goulburn sought a buyer provided strong evidence that the value to be realised from the Saputo transaction represents a fair price.
Murray Goulburn invited 29 parties to enter into some form of corporate transaction, Grant Samuel said..
Of the $1.3 billion offered by Saputo, about $114 million will be used to fund additional milk payments to Murray Goulburn's suppliers, including a step-up in the farmgate milk price of 40 cents per kilogram of milk solids and an extra retention payment of 40 cents per kgms.
After taking into account other factors such as net debt, transaction costs, and ongoing operational costs, Murray Goulburn has estimated that the net equity value of the Saputo offer is about $653 million.
That equates to a value per share/unit, or full value, of $1.15 to $1.20.
Another independent expert, KPMG - which was engaged by Murray Goulburn's listed entity, the MG Unit Trust - concluded that the full value estimate of the asset sale proceeds is fair and reasonable.
Murray Goulburn will make an initial distribution of the asset sale proceeds of 80 cents per share/unit within 10 days of completion of the takeover, currently expected to be on May 1.
Murray Goulburn will keep $235 million to meet any potential exposure to legal claims against the co-operative, and for operational costs, including winding-up costs.
After the conclusion of the legal matters, the Murray Goulburn board will distribute any remaining funds to shareholders and unit holders.
Murray Goulburn shareholders will meet on April 5 in Melbourne to consider the proposed sale to Saputo.