Glenboden M & A Originations

Arla exit in Poland shows strength of local dairy co-operatives

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Origination Status seller announcement, October 2011
Asset Gościno mozzarella and yellow cheese factory, north-west Poland
Buyer undisclosed, rumoured to be a large domestic dairy co-operative
Seller Arla Foods amba (Denmark), global. no.4 dairy co-operative
Buyer Rationale expansion in mozzarella category, exit of foreign competitor
Seller Rationale rationalisation of cheese production in Baltic region
NBs insiders believe that Gościno will be bought cheaply (debt, employees).
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The GM for Europe of a global dairy co-operative group commented to Glenboden, that 'consolidation in Poland is a matter for the domestic dairy co-operatives to decide'. The sale by Denmark's Arla of its principal dairy operation in Poland supports that opinion quite emphatically. We look at Polish dairy co-operatives and Arla's position vis-a-vis them going forward.

Poland relegated in Arla's priorities ...When it formulated its five-year strategic plan in late 2008, Poland was one of two countries, with Germany, that were to join the UK, Sweden, Denmark and Finland as Arla's 'core markets'.

However by the end of 2010, with Poland still representing under 1% of Arla's group revenue, that country was demoted to becoming only a 'growth market', alongside Russia, USA, China, the Middle East & north Africa.

The importance of Poland for Arla suffered another blow in October 2011, when Arla announced the signing of a letter of intent to sell its only dairy in Poland, in Gościno, to an unnamed buyer (large domestic co-operative ?). That leaves the group with only a cheese slicing operation, in Tychowo in northern Poland.

... greater progress made elsewhereWith an ambitious strategic plan, to increase global sales to 75 bln DKK by 2015 from under 50 bln DKK in 2010, clearly Arla has had to focus on markets in which attractive, large acquisition opportunities emerged. Those have proven to be Holland, Germany and Sweden; not Poland.

In early 2011, Arla completed its absorption of Hansa-Milch, a leading fresh dairy producer in northern Germany. Then in July 2011 it announced negotiations to acquire a cheese maker in southern Germany, Allgauland -Kaserein. With these deals, Arla is on target to become no.3 dairy player in Germany.

Then in 2009 it grabbed an opportunity to add Holland to its core markets, when the giant merger of Friesland and Campina caused the EU competition authorities to demand the sale of Fresh Nijkerk. More recently, Arla has also made bolt-on purchases of financially troubled dairies in its home markets, notably the imminent acquisition of Milko in Sweden.

... Poland still going aloneMeanwhile in Poland structural development, i.e. the consolidation of the dairy co-operatives, has been described by Arla as 'sluggish'. We think that's unfair, given that the biggest dairy groups in that country, namely Mlekovita, Mlekpol and Polmlek, have since the 1990s jointly absorbed over 20 smaller dairies.

The problem for Arla is that, as the ex -GM of Arla in Poland said to Glenboden, dairy consolidation has been an insider affair so far in Poland, not friendly to global groups. There's also the point that even the largest dairy co-operatives in that country have annual sales of well below € 1 bln.

On the other hand the larger Polish dairy groups are growing very fast, and one day may reach a stage where they seek to join a big pan-European group. In the meantime Arla may be limited to joint-ventures or other partnerships in certain product categories, in Poland.

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THIS LEAD'S VALUATION
Size (€ mln) 100 FTEs
Sector dairy products
Asset Quality Poland regional unbranded
Seller global co-operative
Buyer domestic co-operative
P/S neg.
P/Ebitda neg.
Type value estimate
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