In a 76-paged issues paper made public on Tuesday, the Australian Competition and Consumer Commission challenged some of Murray Goulburn's assertions that there wouldn't be a negative impact if it acquired Warrnambool Butter & Cheese.
''The ACCC considers that … there is potential for the proposed acquisition to have the effect of lessening competition in the acquisition of raw milk,'' said the report, which had parts blacked out.
The commission also questioned whether there would be a positive impact on the volume or value of Australian dairy exports if Murray Goulburn acquired control of Warrnambool.
The agency made similar comments when Murray Goulburn tried to acquire Warrnambool in 2010.
The commission is assisting the Australian Competition Tribunal, which is set to begin hearings on Murray Goulburn's bid on Feb. 10. The tribunal could rule by the end of February or take until the end of May to decide.
Murray Goulburn's offer is conditional on receiving the tribunal's approval along with it obtaining more than half of Warrnambool's shares.
The co-operative wants the tribunal to determine that the merger of Australia's first and fourth-largest dairy processors would be a "public benefit" to the country by significantly enhancing the company's international competitiveness.
It claims the transaction will result in "substantial" cost savings and efficiency gains without "any meaningful lessening of competition in the market for the acquisition of raw milk or other detriments."
Murray Goulburn disputes the commission's definition of the relevant market that would be negatively affected as being localized regional areas in Victoria and South Australia.
But the commission said MG's estimates of the broader benefits of the transaction "may be overstated."
Warrnambool's board formally rejected Murray Goulburn's A$9.50 per share bid on Tuesday, saying it is "highly conditional and uncertain."
It described Saputo's latest offer, which is set to expire Friday evening, is "superior" based on value, certainty and timing.
Saputo (TSX:SAP) is currently offering AU$9 per share if it doesn't get a majority of WCB's stock but it would pay more if it gets more than 50 per cent of outstanding shares.
Saputo will pay AU$9.20 per Warrnambool share if it gets a simple majority, AU$9.40 per share if it gets 75 per cent of the total and AU$9.60 per share if it gets at least 90 per cent of WCB's stock.
The Montreal-based cheese and dairy company declined to comment Tuesday on the commission's assessment or Warrnambool's rejection of its rival's offer. Spokeswoman Sandy Vassiadis also wouldn't say if Saputo will extend its deadline.
Small dairy United Dairy Power is reportedly seeking to sell part of the company, but Vassiadis said that Saputo isn't looking at other potential acquisition targets.
"Our main goal is to move forward with the WCB and that remains our priority so there's nothing else that we're looking at," she said in an interview.
WCB urged shareholders to reject Murray Goulburn's offer, warning that many of the vaunted public benefits are predicated on its acquiring 100 per cent control of WCB, which is unlikely given that nearly 47 per cent of shares are controlled by Bega Cheese, Saputo and Lion.
Warrnambool also said it can't confirm the value of the suggested synergies because they haven't been publicly detailed by Murray Goulburn.
"The intentions of Murray Goulburn regarding the future of WCB's operations are unclear in a number of material respects. The creates uncertainties for a range of WCB shareholders," chairman Terry Richardson wrote in a letter to shareholders.
It warned that Murray Goulburn's moves to extract cost saving could result in office closures and job cuts that would have "a negative impact on the local economy and community." Conversely, it said Saputo's launch into Australia would result in continued employment and the "preservation of WCB's heritage and identity."
Analyst Irene Nattel of RBC Capital Markets said the competition commission's view "does not auger well for Murray Goulburn."
She also dismissed reports that a Chinese company may enter the bidding.
"Given the cluttered playing field, we view the probability of a new player entering the bidding war as low."
On the Toronto Stock Exchange, Saputo shares closed up 10 cents at $48.75 on Tuesday.