Glenboden M & A Originations

Emerald Dairy a high-octane acquisition opportunity in infant formulas in China

Priority Rating priority rating 4
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Origination Status proprietary origination, May 2009
Asset Emerald Dairy Inc (USA), leading infant /children’s formula and milk powder producer in China
Buyer candidates include Danone, Nestle, Heinz
Seller Emerald’s CEO, other founders and public shareholders
Buyer Rationale fast-growing platform in high-potential Chinese IMF market
Seller Rationale strategic partner for major capex and expansion programme, product knowhow
NBs Emerald plans to further treble production capacity and sales by 2011
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The Chinese infant milk formula market is growing by 20% per annum; Emerald’s near sixfold growth in sales revenue since 2006 suggest it’s outperforming that market. The group is however burdened by high selling costs, caused by its rapid distribution expansion, and needs to quickly raise capital for a very ambitious capex programme. The time may be ripening for a multinational IMF player to make a bid for this public company.

Emerald is a major independent IMF player in China …Emerald’s total sales revenue in 2008 came to nearly US$ 45 mln. It’s two IMF brands are Xing An Ling, targeted at low-end consumers, and Yi Bain, aimed at mid to high-end ones. The group claims to have been the first to obtain organic certification in China, and plans to enter that segment in 2009.

… but the group’s cost structure is burdened by selling costs …Milk powder accounts for over 80% of Emerald’s sales, and enjoys a gross margin that’s grown to 50% in Q1 2009. At the same time, the group’s EBITDA margin is disappointingly under 10%

The main cause of the gulf between gross margin and EBITDA are selling expenses, which constitute as much as 25% of Emerald’s cost structure. That’s due to the rapid expansion of the group’s distribution in China; now covering 5,8k retail outlets in 20 provinces, and employing 800 salesmen.

… and the balance sheet needs to support major capital expenditure …A parallel burden is Emerald’s capex programme. The group is currently producing at full capacity, and plans to complete two new production lines, at its two dairies in China, to treble total capacity from 9k tonnes per annum today to 27k tonnes in 2011.

The total cost of that investment is estimated at US$ 35 mln. Thanks to past capital contributions, Emerald’s cash reserves at Q1 2009 come to over US$ 8 mln; that balances debt and investment contract commitments of US$ 12 mln.

… while EBITDA is relatively low …However the remaining US$ 25 mln, needed for the capex programme, has to come from additional debt or equity capital increases. That might be problematic, in view of the low profitability of Emerald at present; EBITDA was less than US$ 4 mln in 2008. China’s economy is also slowing now.

… providing a window for a strategic buyerSo there could be an opportunity now, for a multinational major in infant nutrition, like Nestle or Danone or Heinz, to enter into negotiations with Emerald’s principal shareholders. These are its CEO, Yang Yong Shan, who owns nearly 50% of its outstanding shares; a further 20% are owned by two investors in the US, and the rest is free floating on the OBB exchange in the US.

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Size (€ mln) 70
Sector infant nutrition
Asset Quality China independent branded
Seller small plc
Buyer large plc
P/S 2,25
P/Ebitda 25,0
Type enterprise value estimate
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