Glenboden M & A Originations

Consolidation bites in German dairy with Arla - Hansano deal

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Origination Status announcement of merger plans, December 2010
Asset Hansa-Milch eG (Germany), major fresh dairy producer in northern Germany
Buyer Arla Foods amba (Denmark /Sweden), no.4 global dairy co-operative
Seller farmer (co-operative) members of Hansa-Milch
Buyer Rationale growth, European expansion, strategic aim in Germany
Seller Rationale strong international partner in consolidating German market
NBs Arla failed to merge with Holland's Campina in 2005
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If the merger with Hansa-Milch goes ahead, Arla will take a big step forward in its five-year plan of 2008. It will help create the scale and the portfolio for success in a consolidating German dairy market. We look at the M&A trajectory of Arla, into Germany and beyond.

Consistent with strategic plan ...Arla is the biggest dairy processor in the Nordic region and in the UK, and the no.4 dairy co-operative globally.

Its five-year plan has not yet been delivered upon in terms of expansion; in 2009, top-line growth was negative, and sales beyond Arla's native Denmark & Sweden did not increase above 60%.

Merging with Hansa-Milch will help to remedy the above, and bring the group closer to its ambition of becoming the no.3 dairy player in the German market.

... complementary businesses in Germany ...From Hansa-Milch's perspective, this deal secures it a 'strong international partner' in its domestic market. That suggests consolidation pressures are biting more in Germany, with Humana and Nordmilch set to merge in 2011.

The deal will combine Arla's international strategic portfolio in specialty cheese ('Arla' and 'Castello'), and 'Lurpack' butter, with Hansa-Milch's strong regional portfolio in fresh dairy products.

That combination will be increasingly important, for providing the German retail trade with a full-range dairy offering.

... scale and milk guarantee show Arla's on top ...With over 8,5 bln litres of raw milk processed in 2009, Arla is more than x10 the size of Hansa-Milch; so it's clearly more of a takeover by Arla, than a merger.

That's confirmed by the message that the farmer members of Hansa-Milch will receive raw milk price (and volume) guarantees from Arla.

Those farmers remain as members of the enlarged co-operative, but only the farmers from Denmark and Sweden will continue to be its owners.

... which country next for Arla ?The deal with Hansa-Milch, if approved, confirms that Arla has a workable model in place for merging with smaller dairy co-operatives in Europe.

Looking at the group's sales by geography, there are other international markets, beyond Germany, in which Arla could enhance its presence (see chart).

In its five-year plan of 2008, the group cited Poland as another strategic market. For now that country, with its large but fragmented dairy market, is under-represented in the group's sales reach.

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THIS LEAD'S VALUATION
Size (€ mln) 700 mln litres
Sector dairy products
Asset Quality white products north Germany
Seller mid-size co-operative
Buyer large co-operative
P/S n/a
P/Ebitda n/a
Type raw milk guarantees
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