Broker Exane BNP Paribas said this week that “serially acquisitive” French dairy conglomerate Lactalis could use its “unfathomable firepower” to target Dairy Crest, and the latter’s share price has risen from 358p on Monday to 372.2p (as we went to press).
The note followed criticism of Lactalis by Italian politicians, after the firm acquired a 29% stake in Parmalat; with the Italian government looking at copying French rules ring-fencing native firms from unwanted takeovers, BNP Paribas maintains that any share divestiture would leave Lactalis with cash to burn, with Dairy Crest one viable target.
Serial acquisitor Lactalis
Asked about the likelihood of Lactalis moving for Dairy Crest, Alex Sloane, an analyst at Evolution Securities, told FoodManufacture.co.uk: “It is possible. Lactalis has been quite acquisitive in the EU dairy space in the last couple of years.”
Before acquiring a 29% stake in Parmelat on March 22, Lactalis secured regulatory approval last August to buy the dairy arm of Spanish food group Ebo Puleva for €630m (£553m) and also bought Spanish firm Forlosa’s cheese business in February 2010.
Sloane said that the rationale behind a deal for Dairy Crest would involve Lactalis being forced to sell its Parmelat stake – something it does not want to do – but that the French firm could still be interested, since the UK firm “is a fairly decent fit in terms of category overlap”.
Müller more likely?
A more likely Dairy Crest suitor could be Müller, Sloane said; the German dairy giant revealed in September last year that it had bought a 3.04% stake in Dairy Crest, and is on record saying that it admires both the company and its management team.
But Julian Wild, corporate finance partner, Rollits, said: “I’d be pretty surprised if Müller was a potential bidder,” adding that he thought the talk of anyone “prowling around” Dairy Crest was a natural upshot of market excitement following the Northern Foods takeover.
“I think Dairy Crest are also pretty happy to stay as they are,” he said, but added that, of the two dairy titans, he saw Lactalis as a more likely bidder than Müller, and cited its proactive recent bid to buy 50% of Yoplait, despite its “bloody nose” and defeat to General Mills.
Tough times in liquid milk
Wild also questioned why the two foreign concerns might want to target Dairy Crest: “Liquid milk is a pretty tough place to be in the UK, since Arla, [Robert] Wiseman and Dairy Crest spend a great deal of time taking business off each other,” he said.
“It’s hard to see anyone wanting to get involved in UK liquid milk … and I’m struggling to see Müller and Lactalis being interested in that.”
Quizzed about Dairy Crest’s recent contract loss with The Co-operative Group (with Wiseman picking up the business) Wild said the only eventual winner would be the supermarkets, who play off the ‘big three’ dairy concerns off against each other.
Dairy Crest could now potentially undercut Wiseman and Arla on price to secure new business and reinforce a sector trend of gradually declining prices, he said.
So is Dairy Crest attractive as a business? “The poisoned pill in Dairy Crest is a big chunk of the UK liquid milk market and a big pile of debt, which is a major put-off for anyone,” Wild said, although he noted that its brands are performing well, as are management.
“Why Muller took a 3% stake I have no idea, but I’d be personally surprised,” if it moved for Dairy Crest, he said, adding that UK liquid milk and cheese were not part of an “obvious strategy” for Müller.
Dairy Crest keeping pace with rivals?
Panmure Gordon analyst Damien McNeela said in a recent note that Dairy Crest was not investing “at the right pace” in its dairies, particularly compared to rival Robert Wiseman.
Sloane said this was a fair point but that he didn’t entirely agree: “Wiseman has been seen as the most efficient of the ‘big three’ over many years and have done a great job of organic expansion to become a national leader over 15 years.”
He said that Wiseman had shifted away from its doorstep business and grown strongly with Tesco, consolidating its position with the recent capacity uplift at Bridgwater, but he also noted Dairy Crest’s £75m capital expenditure investment in its dairies which began last year.
“Dairy Crest argues that post-investment it will be as efficient, if not more efficient” than its rivals, Sloane said, adding that distribution is the major cost for milk processors.
Whereas Wiseman has most of its dairies near the UK’s west coast closer to farmers to minimise journeys and processing times, he said, Dairy Crest’s sites are based around its doorstep business, with nearby depots used as regional hubs to reach convenience stores.