The strong surge in the share price of Bega Cheese on news of the purchase of Vegemite along with the spreads business of Kraft in Australia may encourage the board to tap investors for fresh funds.
Bega is yet to clarify how it will finance the $460 million acquisition, beyond tapping Westpac and Rabobank to borrow the initial funds to pay for the purchase as it concludes parallel negotiations involving other group assets.
![Bega may be tempted to part-fund its Vegemite buy via a share issue.](/web/20170120054606im_/http://www.brisbanetimes.com.au/content/dam/images/1/m/w/o/k/w/image.related.articleLeadwide.620x349.gtv7wu.png/1484888992096.jpg)
Bega told analysts Thursday it is finalising a corporate transaction to part fund the purchase, although until those negotiations are finalised, it refused to give more information.
"There may be the opportunity for a capital raising," Bega's executive chairman Barry Irwin told analysts, "but at this stage we've not concluded on that."
However the company did make it clear there would be a substantial reduction in debt once the deal is finalised.
The deal brings with it ownership of a 6.3 hectare plant in South Melbourne which could be sold and leased back. But until more detail is revealed about how the purchase is to be financed, sharemarket analysts are on the backfoot in advising clients whether to buy Bega shares on the deal.
Bell Potter analyst Jonathan Snape, for example, re-iterated his 'hold' recommendation for Bega shares Friday, even as he hiked to $5.62 from $5.19 his price target for the shares.
"We await further details to accurately account for the business," he told clients in a research note.
Analysts forecasts on the rise in earnings a share of Bega following the acquisition range to as high as around 25 per cent, depending on how the purchase is funded and the degree of any asset sales.
"There is quite a degree of uncertainty about how it will be funded," Morgan's analyst Belinda Moore noted.
Bega shares are trading "cum a capital raising" analysts said, after Bega management failed to rule out a sharemarket raising out when addressing analysts on Thursday.
"The most straightforward of the options, a 1-for-3 rights issue at around $5 a share would address the gearing issue quickly and equitably for shareholders," Bell Potter's analyst Snape told clients.
"One reason we suspect that wasn't addressed initially was the relative trading multiples of Bega shares to the .. acquisition multiple which would have made EPS accretion difficult to achieve."
But the 15 per cent share price surge Thursday, which took the shares clear of $5 could encourage a shift in the thinking.
Bega shares were trading at around $6.50 until investor jitters over weak sales into the China infant milk formula market knocked sentiment, against the backdrop of low global milk, and milk product, prices.
More recently, cuts to milk supply globally coupled with renewed strength in the China market has set the scene for an uplift in dairy prices which could help revive margins at Bega's extensive dairy business, for example.
Along with the cost of the acquisition, Bega was anxious to point out the Vegemite and spreads businesses are "capital light" meaning there is no need for large ongoing capital spending, although the purchase does come as it is finalising plans for a new information technology (IT) system which forms a large portion of a planned $40 million spending program across the business.
In closing trading, Bega shares had hung onto Thursday's price surge to edge ahead 3c to $5.19, moving between a range of $5.08-5.26 on the day.