Bongrain-Sodiaal tipped to consolidate and split Entremont dairy
- July 10, 2009
||investment proposals received, July 2009
||Entremont Alliance (France), no.4 domestic cheese producer
||candidates are Bongrain-Sodiaal and Lactalis (both France)
||Albert Frere (64% of shares), Unicopa Dairy Co-operative (36%)
||dairy consolidation in France, leadership in Emmental market in EU
||opposition to Lactalis is strong on several levels
By the end of July it should be decided which of the two bidders for Entremont, Bongrain-Sodiaal or Lactalis, will be selected to rescue that loss-making and indebted group. Foreign suitors, notably Fonterra and Arla, have already withdrawn from the race. Whatever the outcome, this will be a positive step to consolidating the French cheese sector and milk collection. We believe that Bongrain-Sodiaal will be the winner; Lactalis provoking too much opposition and overlap.
Entremont had sales revenue of €1,6 bln in 2008, putting it in fourth position amongst cheese makers in France (see chart). It booked a net loss of nearly € 35 mln in 2008, with a further loss of nearly € 20 mln in Q1 2009. The group also has debt of € 375 mln, deemed to be too high and in need of refinancing.
It appears that 'internal' solutions are excluded. The banks don't want to take a hit or make a debt-equity swap; the majority shareholder, through his vehicle CNP, doesn't want to re-capitalise the business; the minority co-operative shareholder is itself close to bankruptcy. Hence the effort by the Inter-ministerial Committee of Industrial Restructuring to select an external partner.
On the face of it, a takeover by Lactalis would be the cleanest option. It's a single company with a tightly-knit management; it's got strong acquisition momentum; it's also apparently prepared to acquire 100% of Entremont.
However, the Lactalis bid is riddled with problems and conflicts. It's opposed by Entremont's milk suppliers, as the group has a reputation for being tough on milk prices. This could only deteriorate in the event of a takeover, at least in the Brittany region where Lactalis would become the dominant milk collector.
The banks might also oppose it, because Lactalis is rumoured to be prepared to only take on € 200 mln of Entremont's debt.
The group also has a record of aggressive valuations in its acquisitions, which will discourage Albert Frere and Unicopa.
On top of that, there are the industrial issues. Together with Entremont, Lactalis would control 40% of the EU market in Emmental cheese, which would create anti-monopoly problems.
Lactalis already has a record of breaching anti-monopoly rules; for example, it recently had to pay a € 5 mln fine for abuse of its position in the Roquefort cheese market.
In addition, there is considerable overlap in the two groups' production of AOC cheeses, especially Comte. Entremont produces 15.000 tonnes of that premium product, providing a market for nearly 50 milk co-operatives in the Franche -Comte region; if Lactalis acquired the business, then some of Entremont's five AOC factories may be closed, in the interests of manufacturing efficiency.
But how serious is Lactalis about buying Entremont anyway ? Besides the problems outlined above, Lactalis is itself quite highly indebted, a legacy of its rapid growth and series of major takeovers in the last five years. It also has other priorities, with its main strategy being expansion outside France.
Although secretive about its financial results, Lactalis is rumoured to have debt in the region of € 3,5 bln - equivalent to nearly 40% of its 2008 turnover of € 9,3 bln. Ironically, that makes Entremont's debt seem very modest by comparison - € 375 mln is only 25% of that group's sales revenue. (Of course this doesn't take into account differences in EBITDA).
Turning to its expansion strategy, Lactalis aims to become the leading global cheese player. Since 2006, all but one of its eight acquisitions have been outside France. The group is rumoured to still have designs on such big fish as Parmalat in Italy, and Dairy Crest in the UK. How does Entremont fit into this?
In terms of transaction comfort, a deal with Bongrain-Sodiaal would be much smoother for Entremont. However, this may lead to a split up of the group.
There are strong pull factors from Entremont, its regional authorities, milk suppliers and even the CIRI, for a deal with Bongrain-Sodiaal. Not least the overlap, in terms of milk collection regions and cheese portfolio, is much smaller than with Lactalis. (Competition is only significant in the raclette category).
Sodiaal is already strategically intertwined with both Bongrain and Entremont, in the form of 50:50 joint ventures; in cheese with Bongrain (Compagnie des Fromages), and in ingredients and butter with Entremont (Nutribio and Beuralia). This puts Sodiaal at the centre of the triad.
Financially, Sodiaal exhibits stronger dynamics than Bongrain, but its co-operative model makes it timid as an acquiror. Bongrain is a public company, but is in financial decline and plans its own restructuring. Nonetheless, a deal with Entremont could help both partners.
In 2008, Sodiaal increased its sales revenue by nearly 25%, to € 2,7 bln. It also increased its EBITDA margin, and its net debt is just over x1 EBITDA. However, that margin is still only 2%, as 80% of Sodiaal's sales are of low-value consumption milk and raw milk.
Strategically, the group might wish to increase the share of ingredients in its portfolio, which currently contribute only 10% of sales revenue, to enhance its profitability.
65% of Entremont's turnover is from industrial products, equivalent to over € 1 bln. This could increase Sodiaal's industrial business, by a factor of five to € 1,3 bln, equivalent to nearly 30% of its global sales, making it a very significant player in ingredients and formulas in future.
This is a rational evolution for Sodiaal, as a predominantly milk producer, in a market where cheese is already dominated by three very large players (Lactalis, Bongrain, Bel).
Bongrain experienced low growth and a 40% drop in operating profit in 2008; in Q1 2009 its sales then fell by over 10%, with cheese down by over 5% and industrial products by nearly 20%. The group is in the process of restructuring its workforce and brand portfolio. Acquisitions have been on hold for some time.
So, the timing isn't ideal for Bongrain to buy and recapitalise the ailing Entremont, especially when margins on Emmental cheese are so low at present. Besides which, Bongrain is focused on soft mould cheese, while Entremont makes hard and semi -hard cheeses.
On the other hand, 35% of Entremont's sales in 2008 were of cheese, equivalent to € 560 mln. That would increase Bongrain's cheese sales by 25%, to nearly € 3 bln, strengthening its no.2 position behind Lactalis' € 4,5 bln in cheese turnover.
As an extra bonus, cheese constitutes only 15% of Sodiaal's sales; it doesn't have the profile of a cheese major long-term, and could cede this business to Bongrain, with whom it already has a 50:50 joint venture in that category. That would add a further € 350 mln in cheese turnover to Bongrain; it would also mean that the share of packaged cheese in Bongrain's total sales would increase to 75%.
In terms of deal structure, it appears that the minority shareholder of Entremont, the Breton dairy co-operative Unicopa, is itself in grave financial difficulty (as often happens to milk producers that forward -integrate into finished products manufacture).
One route would be for the Bongrain-Sodiaal consortium to acquire Unicopa's 36% stake, then re-capitalise Entremont to mollify its banks. The split of the cheese and industrial businesses of Entremont would occur at a later stage.
Whatever the outcome, the valuation of Entremont is likely to be low. The combined EBITDA of Bongrain and Sodiaal in 2008 was only € 250 mln, with a joint net debt ratio of x2. Even if that ratio was to increase to x5, the amount available would only be sufficient to absorb Entremont's debt.
At the equity level, therefore, the transaction might need to take the form of a cash -free merger.