Fonterra best placed to win Dairy Farmers tender and set a precedent
- May 16, 2008
||competitive tender for company sale, May 2008
||Dairy Farmers (Australia), no.1 domestic branded dairy business
||Fonterra dairy co-operative giant (New Zealand) to emerge as winning bidder ?
||2.000 farmers that own the Dairy Farmers co-operative
||est. valuation of A$ 1 bln, represents enterprise value P/S of 1,0 and P /EBITDA of 19,8 (2007A)
||expansion of branded fresh dairy business, footprint in larger adjacent country
||timing, margin pressures, liquidity event for owners
||acquisition must be ratified by 75% vote of assembly of representatives of Dairy Farmers
This is an important deal to watch for anyone whoâs interested in dairy M&A involving large co-operatives. We believe that Fonterra should win the bid easily, because it offers enough strategic rationale and financial clout to blow the other bidders out of the water. If that happens, then weâll have the very interesting precedent of a major dairy co-op actually acquiring another one, rather than just performing a cashless merger as with e.g. Friesland â Campina.
Dairy Farmers has a stable of strong brands across the whole spectrum of chilled dairy in Australia. The most highly tipped bidder so far is National Foods, for obvious reasons. It would extract enormous synergies after the deal, because of the largely overlapping portfolio (NF has no.1 positions in fresh milk, yoghurt, chilled desserts and specialty cheese, categories in which DF also has a strong position). On top of that, NF made a bid for DF in 2000, which was turned down, and this time around itâs already put in an indicative offer. So, you could say that theyâre in pole position to win this tender.
But lose they might, for a number of reasons. Firstly, the companyâs recent strategic development seems to be in chilled juice, where it is market leader in Australia after acquiring Berri in 2005. Secondly, will Kirin Holdings, NFâs owner, agree to underwrite a further A$1 bln in debt, to acquire DF, after it raised A$ 2,8 bln in new debt to acquire NF itself only a year ago ? Thirdly there are the obvious anti-monopoly considerations; if NF teamed up with Parmalat for the bid, then the latter could perhaps mop up the assets which NF was forced to cede, but it appears that Parmalat has put in its lot with Murray Goulburn instead.
MG is the largest milk processor in Australia, controlling 35% of the countryâs milk supply. This makes it what we call the âstate savings bankâ of the domestic dairy industry. It had A$ 2 bln in sales in 2007, but has low margins because it mostly produces semi-products and private label cheese and butter. Its value-added strategy, consistent with co-ops with that profile the world over, is focused on customized ingredients and nutritional supplements, and not on the branded consumer products offered by DF.
On top of that, the pairing with Parmalat is awkward to say the least. The group looks weak in Australia, with its Q1 2008 EBITDA declining to a paltry A$ 3 mln, down from A$ 10 mln a year earlier. Moreover, the partnership of Parmalat, a public company, with MG, a co-operative, can only mean one thing â that DF will be split up if that consortium wins. That will be as complicated to execute as it will be unpopular with DFâs farmer owners. We think this bid wonât be serious in the end.
Then thereâs the giant Kiwi champion, Fonterra. This is a group which controls one third of global dairy exports and contributes 7% of New Zealandâs GDP. In sales revenue terms, itâs three times as big as NF and MG combined; it also has NZ$ 5 bln in shareholdersâ funds; its 2007 operating cashflow was big enough on its own to acquire DF outright. On top of that, Fonterraâs strategic focus in 2008 is to grow its consumer branded business, which so far only represents 30% of total turnover. In short, if Fonterra wants to win this bid then it could do so quite easily.
Recently, Glenboden has pointed to a worldwide spate of dairy sector M&A deals, from the Leitbom deal in Brazil, through Frieslandâs merger with Campina, to the bolt-on acquisitions by Lactalis and Bel in central and south-east Europe, The dairy industry is notoriously fragmented, so we believe thereâs a lot more to come in the name of consolidation. And, if Fonterra acquires DF, then weâll have another transaction model to add to this mix â where one co-op buys another for cash.