Acquisition options for Arla dairy in Germany and Poland under new strategy
- November 28, 2008
||announcement of new five-year strategy, October 2008
||candidates include Bayerische Milchindustrie (Germany), Bongrain Polska (Poland)
||Arla Fooda amba (Denmark and Sweden), largest dairy producer in Nordic region
||co-operative owners of BMI, Groupe Bongrain
||response to competitors’ consolidation moves, greater scale in strategic markets
||consolidation pressures, higher milk prices
||Arla withdrew from planned merger with Campina in 2005
Arla has announced that Germany and Poland will join Sweden, Denmark, the UK and Finland as the group’s core markets. At the same time, the Castello and Lurpak brands have been prioritized, which means a continued focus on cheese and butter. Putting these factors together, as well as consolidation moves by major European competitors notably Campina and Friesland, we can expect Arla to make a significant acquisition or merger in Germany and/or Poland in the near future. We look closer at the group’s rationale, as well as identifying some potential candidates in those geographies.
Formed by the merger of Sweden’s Arla and Denmark’s MD Foods in 2000, Arla amba accounts for more than two-thirds of milk production in Sweden and Denmark. It’s also the biggest dairy processor in the UK, after having entered that market through acquiring Express Dairies in 2003.
More recently, it also became the second –largest dairy producer in Finland, after acquiring privately –owned Ingman Foods. Now, according to Arla’s new five –year strategy, Germany and Poland will be the next markets in which the group makes a major acquisition.
The motivation is clear. Having failed to seal a merger with Campina in 2005, which would have created Europe’s biggest dairy co-operative with € 10 bln in turnover, Arla has seen Campina succeed in that same objective, with its compatriot Friesland instead, in 2008 (subject to regulatory approval).
At the same time, Arla has seen its counterpart from Norway, the giant Tine dairy co-operative, threaten its profitable position in specialty cheeses in the UK, after acquiring that market’s no.1 blended cheese producer, Ilchester Cheese.
These developments, coupled with the fact that Arla has basically not grown its top line at all in the last five years, and indeed is seeing a decline in revenues in 2008 after EU export subsidies ended, make it urgent for the group to take a major expansion step.
But who might be their acquisition targets in Germany and Poland, and in which categories ?
Arla is a traditional dairy business. 40% of its turnover comes from retail milk, 25% from a broad range of yellow, mould and white cheeses, and 10% from butter and spreads. This is broadly its portfolio mix in each of its existing core markets. One option therefore is for the same to be replicated in Germany and Poland.
In that case, the objective will be a major merger with the biggest dairy co-operatives in those countries, along the lines of the Campina – Friesland deal. In Germany, the contenders might be Nordmilch and Humana; in Poland Mlekovita and Mlekpol.
But maybe something less ambitious would be more actionable, in the short term, in those markets ? Evidence for this can be found in another section of Arla’s five –year strategy, where it states that its global brand focus will be on Castello, Lurpak and a mystery ‘new Arla brand’.
Since Castello is the group’s preferred global mould cheese brand, and Lurpak is that in butter, we conclude that the portfolio focus for acquisitions in Germany and Poland will be cheeses (full range, under Arla and Castello brands), and butter and spreads.
That would be more consistent with the group’s portfolio focus in the US, after its acquisition of White Clover Dairy in that market in 2006. In that case, the acquisition candidates in Germany and Poland are quite different, and outright acquisition is a real possibility as opposed to complex mergers.
In the former country, one attractive tip is the Bayerische Milchindustrie co-operative. It has a strong position in the cheese market in Bavaria, and ambitions in specialty mould cheese across Europe (Paladin brand). It’s also a major whey producer, which might complement Arla’s ingredients operation in capacity terms.
As for Poland, a potential surprise candidate is Bongrain Polska. The French group has failed to maintain acquisition momentum in recent years, compared with Lactalis and Bel. Moreover, its H1 2008 operating profit has collapsed by more than 50%, owing to cost pressures. In Poland it has an attractive branded business, spread across three factories and spanning aged cheese, yellow cheese, fresh cheese and butter. Maybe the Bongrain group will opt for retrenchment now ?