Murray Goulburn Co-operative is now offering AUD$9 per share or AUD$505 million, which is 20 per cent higher than its first bid and 12.5 per cent above Saputo's latest offer.
The Montreal-based company has offered to buy Warrnambool Cheese and Butter for AUD$8 per share or AUD$449 million (C$438 million.)
Murray Goulburn, the dominant Australian dairy processor, said the merger of the two Australian brands would allow it to become "uniquely positioned with scale and capacity to capture the unfolding long-term opportunity in international dairy markets."
The combined dairy, which would have a 41 per cent share of the Australian market, would be globally competitive and deliver benefits to the country's farmers and communities, the company said.
However, it needs the approval of Australia's competition regulator to add Warrnambool's 10 per cent market share.
"The combined company will keep profits in Australia and return them to local farmers under the co-operative's objectives of maximizing farm-gate returns," said Murray Goulburn chairman Philip Tracy.
The current Murray Goulburn bid is double what Warrnambool's shares traded at on Sept. 11, prior to the initial offer by Bega Cheese Ltd. that lead to the three-way bidding war.
Besides regulator approval, the firm, which owns about 18 per cent of Warrnambool's shares, would need to win support from a majority of shareholders.
Saputo (TSX:SAP) didn't immediately respond to requests for comment. The company wants to use Australia as another foothold into the Asian market.
Chief executive Lino Saputo Jr. said last week that he was confident about acquiring Warrnambool despite the nationalist fervour that has been whipped up by rival bidders and opponents of the deal.
After two visits Down Under in the past month, Saputo said he's been a bit surprised by how much attention the process has garnered in Australia and the number of companies that have taken an active interest in Warrnambool Cheese and Butter.
"The fact that there's a number of different players and that it (Warrnambool) is this sought out is surprising to me," he said in an interview.
Its offer won the unanimous support from Warrnambool's board, in the absence of a superior offer, after advisers said the company was worth AUD$6.96 to $7.49 per share.
Warrnambool urged its shareholders Wednesday not to take any action until it assesses Murray Goulburn's latest bid.
Keith Howlett of Desjardins Capital Markets said Murray Goulburn's latest bid is designed to secure a good asset and "hinder an aggressive global player (Saputo) from becoming an immediate competitor in the Australian market."
"It appears to us that Murray Goulburn wishes to buy time until it brings its application before the Australian Competition Tribunal to obtain approval for the transaction," he wrote in a report.
The company plans to submit its request to the regulator by Nov. 28, starting a three-month process.
Earlier, Saputo received clearance from the Australian Treasury, but still awaits the go-ahead from the country's foreign investment review agency, which could come by the end of November.
By raising its bid again, Saputo would further reduce the "negligible" contribution Warrnambool would make to its results, said Irene Nattel of RBC Capital Markets.
"For Saputo, Warrnambool is a strategic acquisition. (It) will have to decide how much it is willing to pay to realize its strategic objective of a foothold in Oceania," she wrote in a note to clients.
Saputo closed down 12 cents at $48.82 Wednesday on the Toronto Stock Exchange. Warrnambool's shares closed at AUD$9.10 on the Australian Stock Exchange, suggesting Murray Goulburn's offer is nearly fully priced.