With the announcement of the Japan-Australia Economic Partnership Agreement (JAEPA) on 7 April 2014, Australia became the first major agricultural exporter to unlock Japan's high import barriers. The JAEPA is said to be the most liberalising bilateral trade agreement that Japan has concluded to date and, along with the ongoing Trans-Pacific Partnership free trade talks (in which Japan and Australia are both members), seems sure to lead to greater incentives for Japanese companies to invest in agribusiness assets abroad and Australia.

As such, we thought it would be an opportune time to follow-up from our June 2013 Japan M&A Newsletter (in which we outlined the process for foreign investment in Australian agribusiness and agricultural land) by focusing on some recent events in the Australian milk industry, which has undergone considerable structural change over the last twelve months, in this newsletter. Two particular examples of this recent transformation of the Australian dairy sector were the revamping of supermarket chain Coles’ private label milk strategy and the arrival of Canadian dairy giant Saputo. As will be seen below, there has been Japanese involvement in both of these events with food and beverage giant Lion, owned by Japan's Kirin Holdings, featuring as a key player in each development.

Murray Goulburn wins supply rights for Coles

The announcement of a ten-year fresh milk supply agreement between Australian agricultural co-operative Murray Goulburn and Coles in April 2013 was a sizeable loss for Lion, Coles’ former supplier, and a clear win for Australia’s largest dairy co-operative.

The arrangement, set to commence in July 2014, covers the supply of Coles’ private label milk, as well as the relaunch of Murray Goulburn’s Devondale-brand milk and cheese.

The entry of a co-operative into the market has been hailed as a victory for both farmers and consumers, in that milk prices will remain at their current low levels but farmers will receive a larger share of the retail price. According to a Murray Goulburn media release, ‘[a]s a co-operative, Devondale will return 100% of the profits from this agreement to its farmer-shareholders through higher farm-gate returns.’ The stability offered by the arrangement has been tipped to facilitate greater investment in the dairy industry as a whole. Murray Goulburn Managing Director Gary Helou described the deal as delivering ‘the most significant investment in dairy processing in this country since deregulation’. The agreement has also been welcomed by lobby group Australian Dairy Farmers as a ‘positive sign of innovation and long term commitment’.

Canadian dairy giant wins bidding war for Australia's oldest dairy producer

The re-shaping of the Australian dairy sector continued with the dramatic arrival of Saputo, the winner of the hotly contested takeover battle for Australia's oldest dairy producer, Warrnambool Cheese & Butter. The bidding war between Saputo, Bega Cheese and Murray Goulburn raged from October 2013 to February 2014 and pushed the value of Warrnambool shares from AUD 4.51 (the price prior to the initial offer from Bega) to AUD 9.40 (Saputo's final offer).

As a foreign person proposing to acquire an interest of 15 per cent or more in an Australian business valued above AUD 248 million, Saputo was required to notify and obtain the prior approval of the Federal Treasurer as part of the process from making its offer. The Treasurer is required to review such applications to determine if they are 'contrary to the national interest'. In making this determination the Treasurer will almost invariably rely on advice from the Foreign Investment Review Board ('FIRB') but the Treasurer has the power to apply conditions to the way proposals are implemented or even block them outright. On 12 November 2013, Saputo received approval without conditions which provided it a clear path to progress its offer. However, interestingly, the much debated decision of the Treasurer to block the proposed acquisition of GrainCorp by American global food-processing and commodities-trading corporation Archer Daniels Midland followed a short time after Saputo's decision and is proof that approval is not a mere formality. (Please see our June 2013 Japan M&A Newsletter for more on Australia's foreign investment review process.)

While Bega and Murray Goulburn eventually sold their significant shareholdings in Warrnambool into Saputo’s attractive bid, Lion decided to hold onto its 10% stake (which it purchased during the bidding period), thereby preventing Saputo from acquiring 100% of Warrnambool. Lion’s motives are unclear but presumably relate to protecting its supply arrangements with Warrnambool.

And Saputo has another problem. The takeover battle – which is being referred to as the ‘cheese wars’ – has resulted in Saputo paying a high price for Warrnambool and, unlike Murray Goulburn and Bega, Saputo cannot realise costs savings by rationalising Warrnambool’s operations with existing operations.

As international demand for Australian dairy products grows, all eyes are on Murray Goulburn, Saputo, Lion and Bega for the next move in the great milk shake-up.