Glenboden M & A Originations

Timing for acquiring the Ukrainian branded dairy leader Ukrproduct

Priority Rating priority rating 4
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Origination Status preliminary announcement of H2 results, December 2008
Asset Ukrproduct Group Ltd (Jersey), no.1 branded cheese and butter producer in Ukraine
Buyer potential buyers include Arla Fooda (Denmark and Sweden), Friesland Campina (Holland)
Seller Alexander Slipchuk, Sergey Evlanchik and minority shareholders of Ukrproduct
Buyer Rationale leading position in large Ukraine market, ready counterparty, strong Euro
Seller Rationale acceptable valuation, financial risks, exit from dairy business
NBs Ukrproduct is registered in Jersey and listed on the AIM of the London Stock Exchange
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With both Ukrproduct's local hryvna and the GBP, reporting currency, weak now and into 2009, the timing looks good to acquire this market leader in traditional dairy products in Ukraine. All the more so when the group’s 2008 performance will be hard hit by the fall in global milk powder prices, thus further softening the valuation perhaps. Also, on the other side of the table, major Euro –zone dairy groups, notably the newly –merged Friesland Campina and the Scandinavian champion Arla, are well placed to make such an acquisition in 2009.

Ukrproduct is Ukraine’s market leader in processed cheese, with 25% share, as well as packaged butter where it has 20% share. It also appears well placed to benefit from the consumer’s migration towards premium products, as well as the evolution of food retailing, in that country.

The group’s focus is on value –added : its main ‘Our Dairyman’ brand is present in 60% of Ukraine’s retail chains, it launched its premium ‘Molendam’ brand successfully in H2 2008, and cheese sales growth in 2008 was driven by its new smoked sausage cheese format. In parallel, it has its own distribution subsidiary, which delivers to modern trade outlets nationwide and includes a retail store network.

These factors should enable the group to build a high entry barrier, in terms of strong brands and in-store presence, as the Ukrainian retail trade modernises.

Ukrproduct is a profitable business, with low debt levels, but is facing risks caused by the global commodity price decline and credit squeeze going into 2009. Sales revenue increased by 35% in 2007, to reach nearly 50 mln GBP, but most of the growth came from an increase in powdered milk exports in that year of record prices.

EBITDA doubled in 2007, to reach over 11% of sales but, again, that was driven by milk powder. The company has drawn attention to the impact of a big fall in the price of this commodity, in H2 2008, which is likely to slash growth and profitability in 2008.

At the same time, Ukrproduct’s operating cashflow is being squeezed by a shift towards modern trade customers. In an effort to conserve cash, the group has cut back its capital expenditure plan for 2008, and is forecasting a near freeze in spending in 2009. Consistent annual dividend payments are also a drain on cash resources.

In this context, the two main owners of Ukrproduct, who together control 67,5% of its shares, might decide to sell the business. These individuals started in business together by establishing a brokerage house in the 1990s, called Alfa-Broker. They’ve built up their stake in Ukrproducts since participating in the privatization of its core dairy, OJSC Molochnik, in the 1990s, seeing the company through several acquisitions and rationalization plans since then.

So, the main owners are not long –term dairy incumbents, and might feel that they’re ready for an exit by now. The time might also be ripe, in terms of major strategic buyer interest, on the part of two European dairy co-operative giants.

Friesland Campina has recently had its merger approved by the EU competition authorities. The merger was cash –free, involving the exchange of shares units by the farmer owners of the two co-operatives, so the combined balance sheet is not laden with debt finance. A major part of the rationale for the merger was international expansion, as the new entity seeks to grow its consumer business in Europe beyond Holland, Belgium, Germany, Romania and Hungary. Ukraine might be next.

Arla Foods, the largest dairy business in Sweden, Denmark, the UK and now Finland, is looking to expand its European presence into new countries. At the same time, the main focus will be on the group’s cheese and butter businesses, led by the Castello and Lurpak brands, which fits well with the portfolio offered by Ukrproduct (all of whose branded sales are from cheese and butter).

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THIS LEAD'S VALUATION
Size (€ mln) 60
Sector dairy products
Asset Quality Ukraine no.1 branded
Seller mid-cap plc
Buyer co-operative
P/S 1,0
P/Ebitda 9,1
Type value estimate
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