Glenboden M & A Originations

Fonterra best placed to win Dairy Farmers tender and set a precedent

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Origination Status competitive tender for company sale, May 2008
Asset Dairy Farmers (Australia), no.1 domestic branded dairy business
Buyer Fonterra dairy co-operative giant (New Zealand) to emerge as winning bidder ?
Seller 2.000 farmers that own the Dairy Farmers co-operative
Financial Terms est. valuation of A$ 1 bln, represents enterprise value P/S of 1,0 and P /EBITDA of 19,8 (2007A)
Buyer Rationale expansion of branded fresh dairy business, footprint in larger adjacent country
Seller Rationale timing, margin pressures, liquidity event for owners
NBs acquisition must be ratified by 75% vote of assembly of representatives of Dairy Farmers
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This is an important deal to watch for anyone who’s 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 we’ll 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 – 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 it’s already put in an indicative offer. So, you could say that they’re in pole position to win this tender.

But lose they might, for a number of reasons. Firstly, the company’s 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, NF’s 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 country’s milk supply. This makes it what we call the ‘state savings bank’ 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 – that DF will be split up if that consortium wins. That will be as complicated to execute as it will be unpopular with DF’s farmer owners. We think this bid won’t be serious in the end.

Then there’s the giant Kiwi champion, Fonterra. This is a group which controls one third of global dairy exports and contributes 7% of New Zealand’s GDP. In sales revenue terms, it’s three times as big as NF and MG combined; it also has NZ$ 5 bln in shareholders’ funds; its 2007 operating cashflow was big enough on its own to acquire DF outright. On top of that, Fonterra’s 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 Friesland’s 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 there’s a lot more to come in the name of consolidation. And, if Fonterra acquires DF, then we’ll have another transaction model to add to this mix – where one co-op buys another for cash.

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THIS LEAD'S VALUATION
Size (€ mln) 625
Sector dairy products
Asset Quality Australia no.1 branded
Seller co-operative
Buyer co-operative
P/S 1,0
P/Ebitda 19,8
Type enterprise value
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