Glenboden M & A Originations

Public capital could spur consolidation in Polish dairy sector

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Origination Status proprietory origination, September 2010
Asset mid-sized dairy co-operatives in Poland (e.g. Piątnica, Spomlek, Krasnystaw)
Buyer largest dairy groups in Poland (esp. Mlekovita, Mlekpol, Polmlek)
Seller co-operative owners (farmers)
Buyer Rationale market share, portfolio expansion, brands
Seller Rationale liquidity event for owners, lack of scale as retail consolidates
NBs 'Irish solution' has been tipped as precedent for Polish dairy co-op consolidation
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Reports say that Poland's biggest dairy producer, Mlekovita, is aiming for a listing on the Warsaw Stock Exchange. For years, insiders have pointed to the 'Irish model' of dairy consolidation, whereby the process is spurred by public listings of the biggest co-operatives, as the way forward in Poland also. Is that about to start?

Public capital to transform merger patternConsolidation in Polish dairy has been inching along since the mid 1990s. So far it's invariably been about the bigger co-ops absorbing their smaller, 'walking wounded' peers, without srategic logic other than to gain access to more milk.

With stock market listings, and access to the powerful currency of public equity, the biggest players could replace that pattern of absorptive mergers, with one of genuinely strategic acquisitions of successful, mid-sized dairy co-ops.

In that scenario it wouldn't just be about more raw milk, but also about gaining brands, portfolios, synergies and critical mass vis-a-vis the retail trade.

Mlekovita the main consolidator ...There are arguably three major entities able to make this breakthrough, to fund strategic consolidation in Poland; Mlekovita, Mlekpol and Polmlek. All are diversified dairy players, with a history of making absorptive acquisitions.

Mlekovita is the one entity that has publicly stated an intention of taking one of its subsidiaries, Morąg, public. That group has about 2 bln PLN turnover, processes 1 bln litres of milk p.a. and has absorbed about 12 smaller co-ops so far.

Mlekpol is about the same size as Mlekovita, and is ironically its near neighbour in the Podlasie region of eastern Poland. It has however been less aggressive in M&A than Mlekovita, having only absorbed about six co-ops to date.

Polmlek is the only one of the three groups that's privately -owned. It's about half the size of Mlekovita or Mlekpol, in revenue and milk supply terms; it has also made about six acquisitions so far.

... matches to be found on the sell-sideTurning now to likely targets of a strategic, fully-funded consolidation round in Poland, we would tip the Piątnica, Spomlek and Krasnystaw co-ops.

Each of those entities is mid-sized, processing 150 - 250 mln litres of milk p.a. Their portfolios are all, predictably, more specialised than the big diversified dairy players discussed above.

Piątnica is the king of white products (ex -milk) in Poland, especially in cottage cheese. Spomlek is focused on hard- and semi-hard cheese, including specialty varieties. Krasnystaw is geared towards fresh dairy products including snacking.

Convince the supervisory boards with precedents ...In discussing whether the owner -farmers of Mlekovita and Mlekpol would go along with such a strategic consolidation scenario, we look at a key precedent from elsewhere in Europe.

The so-called 'Irish model' has been in circulation in Poland since the 1990s. In that country, in the 1980s, three of the biggest dairy co-ops, Glanbia, Kerry and Golden Vale went public.

Today, there are only five dairy groups in Ireland, of which Glanbia is the largest, with 30% share of raw milk purchases. Both Glanbia and Kerry are successful international food and ingredients groups. So, that model has worked.

... plus no loss of controlSeveral leading dairy and other foods co-ops, not only in Ireland but also elsewhere in Europe, have gone public and raised capital, while allowing their original co-operative members to retain majority control over the businesses.

Examples include Ireland's Glanbia; Emmi, the no.1 branded dairy player in Switzerland; Raisio, the no.1 grain -based products group in Finland.

Financial 'pot' incentive for sellersTurning to the targets of consolidation, like Piątnica and Spomlek, there's the promise of the 'liquidity event' that sale of the co-op brings to its owner -farmers.

A precedent for that is the acquisition of the Dairy Farmers' co-op, by National Foods, in Australia in 2007 (see related origination). Alongside continued milk supply contracts, that scenario could be compelling for co-op sellers.

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THIS LEAD'S VALUATION
Size (€ mln) 200
Sector dairy products
Asset Quality Poland category-leader branded
Seller mid-sized co-operative
Buyer large co-operative
P/S 1,5
P/Ebitda 12,5
Type value estimate
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