Leitbom deal exemplifies how global dairy M&A has gathered pace
- April 15, 2008
||company acquisition agreement signed, April 2008
||Laticinios Morrinhos âLeitbomâ (Brazil), no.5 domestic milk processor
||GP Investments Ltd, listed Latin American private equity firm
||total consideration of R$ 326 mln for 100%, represents P /EBITDA of 4,7 (2007A)
||dairy consolidation, attractive valuation in growing market
||competitive pressures, fall in milk semi-product prices
||total consideration includes R$ 18 mln investment commitments
This deal, in distant Brazil, illustrates well the factors behind what is becoming a worldwide spate of dairy sector M&A deals - from Frieslandâs 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. Whatâs 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 âwhiteâ portfolio and a powdered milk business, is vulnerable. On top of that, itâs 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 âadded products. The valuations are likely to be attractive, and the sellers more willing than before. The upside is not googlesque, but youâre 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 companyâs farmer owners for their years of patience, is attempting a âliquidity eventâ 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 thereâs 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.