UPDATE 1-Australian milk science lures food makers tapping Asia's changing diet

Wed Nov 6, 2013 1:00am EST

* Australia's Warrnambool wanted for lucrative milk extracts

* High-end nutraceuticals sector key prize amid Asia demand

* Asia-Pacific to have 39 pct of $205 bln global market by 2017

By Jane Wardell

SYDNEY, Nov 6 (Reuters) - Food companies stalking Australia's Warrnambool Cheese and Butter Factory Company Holdings Ltd are being lured by the firm's high-tech milk extracts as much as its basic dairy produce.

The extracts are a core element in health-promoting products from premium infant formula to bone supplements. Known as nutraceuticals, the extracts are poised for big growth as Asia becomes more affluent and diets change.

With the nutraceuticals market in the Asia-Pacific set to be worth $80 billion by 2017, Warrnambool is sitting pretty. It is one of just two producers of the extracts in Australia, the only country in the region with the scale of spare milk capacity required to produce them.

Extracting just 1 kilogram of lactoferrin, a nutraceutical used in premium infant formula, takes up to 100,000 litres of regular milk.

"Critically, most of the countries responsible for the surging demand in Asia can't produce milk themselves," said Michael Harvey, dairy analyst at Rabobank. "They need countries like Australia that have a surplus of milk to export."

Australia has been producing milk below capacity for years following soaring feed costs and a brutal supermarket price war that pushed farmgate prices to record lows. The country has the capacity to add around 2 billion litres to the 9 billion litres of milk it currently produces each year, exporting about half.

For its part, Warrnambool has almost completed construction of a specialist A$14 million plant to make lactoferrin. The only other producer of the neutraceutical in Australia is major shareholder Bega Cheese Ltd - the company that started the bid war for Warrnambool.

Big global food and drug companies from Nestle SA to Pfizer Inc have developed nutraceuticals operations in other regions. But Warrnambool's comparatively low valuation after milk price wars has combined with its new lactoferrin plans and Australia's spare production capacity to put it firmly on the map as an acquisition target to serve Asia.

Previously little known outside its home base, the 125-year-old company has attracted three full takeover offers from Bega, fellow shareholder Murray Goulburn Co-operative Co Ltd and Canada's Saputo Inc since September. Saputo's bid is the highest at A$449 million ($424 million).

Warrnambool's market value has nearly doubled to around A$470 million as investors snapped up shares. Those buyers include Fonterra, the world's largest dairy exporter, and Japanese drinks maker Kirin Holdings Co Ltd. The duo has bought stakes in Bega and Warrnambool respectively and are hovering with intent to influence consolidation.

For Fonterra, diversifying geographically would also reduce reputational risk after the recall of baby formula products in China and other Asian countries due to a contamination scare. Fonterra already makes a nutraceutical formula called Anlene, a drink intended to improve bone health that is marketed mainly to the elderly in Asia.

'WHITE GOLD'

The global market for nutraceuticals is expected to grow to $205 billion by 2017 from $142 billion in 2011, according to U.S.-based market intelligence agency Transparency Market Research.

The Asia-Pacific region is expected to account for 39 percent of the global market by 2017, or about $80 billion, making it the second-largest market after North America.

Lactoferrin illustrates the appeal of nutraceuticals, which fall short of pharmaceuticals but have demonstrated physiological benefits, providing protection against chronic diseases such as cardiovascular illnesses. Dubbed "white gold" by Australia's media, it fetches $1,000 per kilogram because of the vast quantities of milk used to make it.

Warrnambool, which relies on exports of traditional dairy produce for most of its A$500 million in annual sales, said last week it had signed its first deal to supply lactoferrin in Asia.

The three-year sales agreement with Taiwanese marketing and distribution firm Toong Yeuan Enterprise Co Ltd for lactoferrin in China, Hong Kong and Taiwan is worth A$24 million.

As Warrnambool's nutraceuticals drive takes shape, analysts say the lack of alternative acquisition targets - Bega has share ownership restrictions in place that will take years to lift - means higher takeover offers for the target can't be ruled out.

Since Sept. 11, the day before Bega's offer, Warrnambool shares have surged 88 percent while Bega stock has advanced 67 percent. That compares with a 4.6 percent gain in the S&P/ASX 200 Sydney market index over the same period.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

Find your dream retirement town

Florida? Hawaii? Reuters has teamed up with Zillow to give you the power to customize a list of your best places to retire.  Video | Full Article