Milk deals will keep flowing as foreign interest persists

Industry sources tell us that deals are expected to continue flowing due to attractive dairy export opportunities and the industry’s innate requirement for capital injection.

Strategic players, such as those who bid for Murray Goulburn, have a long-term view of Australia’s dairy sector, and are keen to secure milk supplies by acquiring existing businesses.

They are also eyeing favourable export opportunities as a result of such acquisitions, betting on continued demand from China.

It is expected there will be consistent demand for Australian processing facilities and dairy products such as cheese, yoghurt, and ice cream in addition to baby formula.

Asia is not only interested in consuming dairy products, but also securing the control and supply of it.

Last month, a controlling stake in infant formula manufacturer Blend and Pack was acquired by Hong Kong’s Mason Financial Holdings, at an unprecedented multiple of 18 times forecast earnings before interest, tax, depreciation and amortisation.

Out of eight Australian companies that hold a China Certification and Accreditation Administration and are allowed to export infant formula to China, only two remain independently owned.

They are ViPlus Dairy and Farmland Dairy, and they have been approached by Asian, Indian, European and American suitors, according to a Mergermarket report published in September.

Interestingly, the other infant formula producer, Bellamy’s, which seemed to be experiencing a fiasco earlier this year with its share price dropping as low as $3.70 in January, seems to be back on track with stock now above $12.

Mergermarket recorded 11 inbound and domestic deals in Australia valued at a total of $US655 million ($853m) from November 2016 to now.

The largest, if completed, will be Canada-based Saputo acquiring Murray Goulburn’s operating assets for $1.31bn.

The second largest was Bega Cheese’s acquisition of Mondelez International’s Australia and New Zealand grocery and cheese business for $460m.

Joint venture partnerships are also appealing for domestic players to get close to the Asian consumer.

In July, Australia’s Freedom Foods entered into a binding agreement with Shenzhen JiaLiLe Food to form a new JV company called Australia’s Own Dairy Company China, to grow its presence in China, and is expecting it to be “very significant contributor” of profits.

In the meantime, it has been reported that New Zealand’s Fonterra is eyeing regional mergers, alliances and opportunities in Europe and the US, as it is in a strong position to pick up distressed assets due to price volatility in the past few years leaving some in bad financial shape.

It is unclear how vendors will manage the process, but it is certain that Murray Goulburn had to act quickly because it was in danger of losing milk supply if it delayed the process.

The company is currently at peak milk supply because of a phenomenon called “spring flash” where cows produce a lot of milk and farmers are incentivised to sell quickly. But once “spring flash” passes farmers are free to find other milk processors.

Saputo’s transaction is still subject to approval by ordinary resolution of Murray Goulburn’s voting shareholders, in which it requires more than 50 per cent of the votes cast to be in favour, and other customary conditions including Australian Competition & Consumer Commission and Foreign Investment Review Board approvals. The Saputo deal could bring about divestments not just from the Murray Goulburn but the acquiring company. Bankers say there are companies that are already eyeing potential divestiture assets.

Private equity firms have also been active, with Allegro Funds acquiring ice cream maker Everest Foods in October and Advent Partners snagging Frosty Boy in March.

The ice cream sector is seen as a growth opportunity and is a solid pick as it has good profit margins and is in high demand in Asia, one sector lawyer says.

In August this year, Norco Co-operative’s CEO said it had been successfully exporting ice cream to Japan and saw growth opportunities in China.

Gabriele Rutkauskaite is a financial journalist at Mergermarket


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