Glenboden M & A Originations

Candidates to acquire Dairy Crest after dairies' disposal

Priority Rating priority rating 4
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Origination Status market rumours October 2015
Asset Dairy Crest plc (UK) leading domestic dairy products group
Buyer candidates include Lactalis (France)
Seller public shareholders of Dairy Crest
Buyer Rationale market leadership in branded cheddar cheese in the UK
Seller Rationale timing, maximising shareholder value
NBs Lactalis is present in the UK cheddar cheese market through Seriously Strong, Orkney and Galloway brands
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With the CMA likely to approve the disposal of Dairy Crest's milk business in October, rumours have already started about a takeover of the group's continued operations thereafter. Certainly, the business will be well 'teed up' financially for a sale that maximises shareholder value, in H2 2016; with one stand-out potential acquirer.

Streamlined after milk sale ...In August the Competition and Markets Authority indicated that it will accept certain undertakings from Mueller regarding its competition concerns for the UK retail milk market, post -acquisition. It's set to make its final decision in October.

Dairy Crest's milk business has been a millstone around its neck; in FY 2015 operating profit in that division fell by 90% to only 1.8 mln GBP. After its disposal, the group will become a much more profitable and attractive business for investors.

... branded and value-added growth ...The core business of cheese & whey, and spreads & butter, include strong and healthy brands - 'Clover' spreads, 'Country Life' butter and in particular 'Cathedral City' cheese which is by far the largest cheddar cheese brand in the UK market.

Those two divisions, booked now as retained businesses by Dairy Crest, saw operating profit increase by 19% in FY 2015, to 66,9 mln GBP. Once the group has shed its milk business, its EBITDA margin will be incomparably higher than hitherto.

... completion of investment cycle ...Another feature of Dairy Crest's financials that's conducive to an M&A event is the fact that its capex cycle, focused on the building of a demineralised whey powder and GOS plant in co-operation with Fonterra, is coming to an end.

In FY 2016 therefore, capex will decrease and the group expects net debt to be reduced by 20 mln GBP from its peak of 199 mln GBP in FY 2015 (see profile). As well as being much more profitable in 2016, Dairy Crest will also be fully -invested.

... strong cheese profits in H2 2016Another little treat in store for Dairy Crest's shareholders is that the profitability of its cheese division, which fell by 16% in 2015, is set to rebound in 2016 thanks to the working capital time-lag inherent in the cheese business.

The cheddar cheese produced by the group takes on average one year to mature. The cheese that was therefore moulded when raw milk prices were at their lowest, in H2 2015, will only come to market in H2 2016.

Takeover candidates among trade investors ...As a publicly -listed group with a large free -float, Dairy Crest will always be susceptible to takeover advances, especially when its performance is strong and it holds leading positions in the high -value UK cheese and spreads market.

We see candidates but only amongst major players in the European dairy industry, not from the private equity world. Dairy investments are notoriously unpopular in the private equity world, essentially because of that sector's strong links with primary producers (farmers) and exposure to commodity price fluctuations.

We always like to present at least three M&A candidates in this column, be it on the buy-side or sell-side. In the case of Dairy Crest our three tips are: Lactalis, Lactalis and again Lactalis.

... time for French invasion ?Looking at the big dairy landscape in Europe, we would eliminate the two co-operative giants, Arla and Friesland Campina, because any takeover of Dairy Crest would be a public-to-private deal which arguably is not in the DNA of a co-operative.

In our view that leaves the triumvirate of the three big, privately held French dairy groups, as best placed to compete in a tender or one-to-one process to acquire Dairy Crest.

Of the three, Lactalis is by far the largest, with annual sales revenue of 16 bln EUR, and the only one that's sufficiently universal in its product range to swallow up Dairy Crest as a whole. Bongrain and Bel are only really focused on cheese; and within cheese, neither are specialised in hard cheese. (Bongrain's sweet-spot is in mould cheese; Bel's in processed and portioned cheese).

Lactalis is already present in the UK cheddar market, through its 'Seriously Strong' brand acquired in 2004. Looking at the group's M&A history, it seems that the Besnier family is fond of acquiring national champions in Europe ('Galbani' and 'Parmalat' in Italy, bought in 2006 and 2011 respectively). In the same mould Dairy Crest, as the national champion in the UK, is likely to be as asset that the Besniers covet.

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Size (€ mln) 1 050
Sector dairy products
Asset Quality UK branded cheese and spreads leader
Seller large plc
Buyer private group
P/S 0,6
P/Ebitda 8,0
Type enterprise value estimate
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