Glenboden M & A Originations

Kirin confirms its international M&A surge with Dairy Farmers acquisition

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Origination Status joint announcement of result of competitive tender for sale of dairy co-operative, August 2008
Asset Dairy Farmers (Australia), no.1 domestic branded dairy business
Buyer National Foods (Australia), subsidiary of Kirin Holdings (Japan)
Seller 2.000 farmers that own the Dairy Farmers co-operative
Buyer Rationale leadership in branded dairy in Australia, diversification strategy beyond beer in Japan;
Seller Rationale acceptable valuation, margin pressures, liquidity event for owners
NBs Kirin has announced plans to invest $ 2,7 bln in acquisitions and alliances, mostly overseas
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Recently we predicted that Fonterra would be the winner in the bid for Dairy Farmers; that Northern Foods won’t win alone because of anti-monopoly considerations and because its owner, Kirin Holdings, won’t underwrite enough money. In turns out that the mighty Fonterra was sufficiently distracted by its acquisition of Nestle’s chilled dairy business in Australia, just a couple of months earlier, to withdraw from the race. This left the field wide open to Northern Foods, as the only other serious bidder strategically and financially. Most importantly, this outcome underlines Kirin’s status as a serial acquirer of non –beer businesses outside its native Japan. We look at other candidates for them going forward.

Parmalat will pull out of the race, because of its weakness in Australia; that Murray Goulburn’s industrial products strategy will mean their interest isn’t strong enough; and. These things are gradually occurring. However our tip for winner, New Zealand’s giant dairy co-operative Fonterra, has since withdrawn a solo bid; we think however that they’ll come back into the fray, and place a winning bid in partnership with National Foods, with whom they’ll divide the Australian branded dairy market. However, the price will not be so high now, given Fonterra’s acquisition of Nestle Australia in June.

Northern Foods had been the acquirer of reference with respect to DF, ever since it submitted an unsolicited bid in 2000. The two dairy groups have largely overlapping portfolios, and the potential to extract enormous synergies. With the bold step of that merger finally going ahead, having received competition clearance, we can expect secondary M&A moves in Australian dairy.

One obvious ‘low –hanging fruit’ is Parmalat’s business in that country. The group pulled out of the bid for DF, essentially because it was too small to bid on its own, and had irreconcilable differences with its co-bidder Murray Goulbourn. Parmalat is now reviewing its options in Australia, with the likelihood being that it will now exit that market. NF is obviously a contender, but we believe it’s more likely that Fonterra will be the buyer. That group’s acquisition of Nestle Australia’s yoghurt and dairy dessert businesses gave it the presence in these categories that it so wanted in Australia, alongside its cheese and spreads businesses in that country. However, we don’t think this will be enough to fully satisfy Fonterra’s appetite in that space.

On top of which, and coming back to NF’s parent company Kirin, beverages seem to be its prevalent strategic direction at this time. NF’s last big acquisition was of Australia’s market leading chilled juice company, Berri, in 2005. Also, Kirin already directly owns 46% of a leading Australasian brewer, Lion Nathan. Essentially, the beer market is in decline in Kirin’s homeland, Japan. At the same time, Kirin is the no.2 player in that market, which is still the world’s no.6 largest and a big cash -cow. So, the group has both the strategic imperative and the financial resources to diversify; soft beverages and beer in other, adjacent geographies will continue to top the acquisitions priority list.

Fortuitouly, or otherwise, there are two attractive soft drinks assets now in the divestment pipeline in Australia. In both cases, advisors have been appointed and timelines set. Firstly, Cadbury Schweppes is to split -off and divest its Schweppes soft drinks’ business, which is no.2 in Australia with 20% market share (after Coca-Cola with 60% share).

Secondly, Danone is reviewing options for its flavoured waters and juices business Frucor Beverages. Frucor is market leader in energy drinks in Australasia, and also has significant positions in the fruit drinks and flavoured water markets in New Zealand and Australia.

Moving beyond Australia, InBev is believed to be in the process of selling Oriental Brewery, no.2 in the Soutrh Korean beer market, in order to raise cash to help fund the aftermath of its giant acquisition of Anheuser Bush in the US. Kirin is bound to be carefully watching developments in that deal, in what is an adjacent geography for the group.

One final word on possible secondary acquisitions in the Australian dairy market, after the Dairy Farmers deal. Murray Goulburn is the main runner –up in the tender. It’s the largest milk processor in Australia, with A$ 2 bln in sales in 2007, but mostly produces semi-products and private label cheese and butter. Its value-added strategy is focused on ingredients and supplements, not on branded consumer products, which helps to explain why they lost the bid to Northern Foods.

At the same time, MG might still have a lot of acquisition momentum in its back. How about NF’s supposed partner in the DF acquisition, Warrnambool Cheese & Butter ? It’s a mid –sized commodity dairy company in Western Australia; 45% of its 2007 sales were from cheese, sold either to private label or to branded processors notably Kraft, and another 35% came from skimmed milk powder. Its value –added evolution is taking it in the direction of functional ingredients, with the highlight of its 2008 strategy being to invest in a JV with Friesland to that end. Further consolidation in the Australian dairy market is likely to be accompanied by further specialization; in that case the fit between Murray Goulburn and Warrnambool is compelling.

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Size (€ mln) 520
Sector dairy products
Asset Quality Australia no.1 branded
Seller co-operative
Buyer large plc
P/S 0,7
P/Ebitda 12,8
Type enterprise value
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