Glenboden M & A Originations

Leitbom deal exemplifies how global dairy M&A has gathered pace

Priority Rating priority rating 3
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Origination Status company acquisition agreement signed, April 2008
Asset Laticinios Morrinhos ‘Leitbom’ (Brazil), no.5 domestic milk processor
Buyer GP Investments Ltd, listed Latin American private equity firm
Financial Terms total consideration of R$ 326 mln for 100%, represents P /EBITDA of 4,7 (2007A)
Buyer Rationale dairy consolidation, attractive valuation in growing market
Seller Rationale competitive pressures, fall in milk semi-product prices
NBs total consideration includes R$ 18 mln investment commitments
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This deal, in distant Brazil, illustrates well the factors behind what is becoming a worldwide spate of dairy sector M&A deals - from Friesland’s merger with Campina, through the bolt-on acquisitions by Lactalis and Bel in central Europe, to the strong interest in the Dairy Farmers tender in Australia. The dairy industry is notoriously fragmented, so acquisition candidates are far too numerous for us to single out any tips. What’s important is to understand the timing issues, as well as the criteria for identifying likely sellers.

Take this deal with Leitbom. The EBITDA multiple seems low, considering Brazil is a BRIC country and the company reported a 27% sales increase in Q1 2008. However, this growth was at the tail-end of a major bonanza for commodity milk producers, with global prices at record highs. These are now falling and so a company like Leitbom, with a traditional ‘white’ portfolio and a powdered milk business, is vulnerable. On top of that, it’s only the no.5 player in Brazil, so far away from market leadership.

So the message for acquirors, especially private equity, is to target established dairies that are not market leaders, at least not in value –added products. The valuations are likely to be attractive, and the sellers more willing than before. The upside is not googlesque, but you’re very unlikely to lose money in something so indispensable as dairy products. Roll-up several such dairies, and a successful exit is assured. Alternatively just tease the nearest dairy co-operative champion.

The Dairy Farmers tender, in Australia, provides an instructive contrast to the above model. Dairy Farmers is a co-operative that successfully made the transition into a value-added portfolio, and is now a major branded foods business in that country. Management, seeking to reward the company’s farmer owners for their years of patience, is attempting a ‘liquidity event’ and interest seems strong, from big groups like Parmalat and National Foods. The price tag is expected to be at least x10 EBITDA, maybe even up to x15 if there’s a bidding war.

The moral of the story? A branded milk products player is worth at least twice as much as a traditional dairy. It pays to make that transition.

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Size (€ mln) 125
Sector dairy products
Asset Quality Brazil no.5
Seller individuals
Buyer private equity
P/S n/a
P/Ebitda 4,7
Type total consideration
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