Glenboden M & A Originations

Acquisition options for Arla dairy in selected European geographies

Priority Rating priority rating 4
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Origination Status announcement of agreement intention, March 2009
Asset Friesland Foods Fresh Nijkerk (Holland), domestic fresh dairy producer
Buyer Arla Fooda amba (Denmark and Sweden), largest dairy producer in Nordic region
Seller Royal Friesland Campina (NV), largest dairy producer in Benelux region
Buyer Rationale strategy to become preferred dairy producer for consumers in northern Europe
Seller Rationale European Commission competition authorities’ decision
NBs Holland becomes new core market for Arla as a result of this acquisition
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In October 2008, Arla announced that Germany and Poland will join Sweden, Denmark, the UK and Finland as the group’s core markets. Since that time, however, the group seems to have made a couple of opportunistic acquisitions instead, in Denmark and now Holland. This is understandable, considering how many significant cheese and butter producers are in sale condition now, throughout northern Europe. We look at some other candidates for Arla in selected geographies.

Formed by the merger of Sweden’s Arla and Denmark’s MD Foods in 2000, Arla accounts for over two-thirds of milk production in Sweden and Denmark. It’s also the biggest dairy processor in the UK, after having entered that market by acquiring Express Dairies in 2003. More recently, it also became the second –largest dairy producer in Finland, after acquiring privately –owned Ingman Foods.

According to Arla’s new five –year strategy, Germany and Poland will be the next markets in which the group makes a major acquisition. However, given timing issues, plus the fact that the group’s focus is on the branded size of commodity dairy (‘Castello’ cheese and ‘Lurpak’ butter), Arla is faced with tempting acquisition opportunities in other European markets also.

Financially Arla is in a strong position to buy smaller dairies. Its 2008 the group missed its profit target, achieving 560 mln DKK instead of 900 mln DKK. However, and typically for a big co-operative, this is just a smoke-screen. With sales revenue up 4% to 49 bln DKK in 2008, those profit numbers are insignificant; the real measure of Arla’s financial condition is that its milk price in 2008 increased by 14%, to reach a new record. This means it has strong underlying cashflow.

The most ‘low-hanging’ option for the group is surely Synnove in Norway. Given Arla’s strong presence in the other Nordic countries, this acquisition is highly adjacent; besides which Synnove is the only significant cheese producer in Norway, other than the giant Tine co-operative, so the only realistic option for Arla to enter that high-value market. In 2008 Synnove achieved its long –awaited financial recovery, thus putting itself squarely on the radar screen as an acquisition candidate.

Coming back to Germany, Arla has recently been rumoured to be in negotiations to buy Viol dairy. Another tip, in our view, 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). As a mid-sized co-operative, it will find it ever harder to compete with Nordmilch and Humana.

As for Poland, a potential candidate is Bongrain Polska. That French group has been in decline both financially and in terms of acquisition momentum, recently. In Poland it has an attractive branded business, spread across three companies and spanning aged cheese, yellow cheese, fresh cheese and butter. Another option in that country is the Polmlek group. It’s the only significant traditional dairy business that’s privately owned, in Poland; its ambitious growth has included eight domestic acquisitions and a focus on building the ‘Warmia’ brand in cheeses.

Finally we turn to Ukraine. The entry cost into that big market is low right now, given the weakness of the local hryvna. Ukrproduct is that country’s market leader in both processed cheese and packaged butter. Having its own distribution subsidiary, it’s also well placed to benefit from the consumer’s migration towards premium products, as well as the evolution of food retailing, in that country.

Ukrproduct’s branded product sales grew by 50% in H1 2008, to reach 70% of total sales of 25 mln GBP; however the EBTDA margin decreased to under 9%, and low global powdered milk prices are a drag on the company. With working capital expanding, and capital expenditure plans put on hold, the two individuals that own most of Ukrproduct’s shares might be open to selling now.

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THIS LEAD'S VALUATION
Size (€ mln) 200
Sector dairy
Asset Quality Holland fresh branded
Seller large co-operative
Buyer large co-operative
P/S 1,0
P/Ebitda n/a
Type value estimate
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