Analysts are split on the size of benefits Müller may derive from the deal

Analysts are split on the size of benefits Müller may derive from the deal

Müller and Robert Wiseman Dairies are talking up the benefits of the German yoghurt maker's planned takeover of the UK milk supplier but profits in the sector have been under pressure in recent months. Dean Best looks at why Müller has made a bid for Wiseman and outlines that challenges that could await the company.

A frantic week of trading updates from some of the UK's largest grocers culminated, as we know, with a profit warning from Tesco that shook not just the food retail sector but the business world as a whole. 

The numbers from Morrisons, Marks and Spencer, Sainsbury's and Tesco - and why some fared better than others - were covered at length on just-food last week. However, by Friday, the spotlight shifted to the biggest supplier of one of the sector's staple products with the unexpected news that German yoghurt giant Müller was in talks to buy Robert Wiseman Dairies, the largest fresh milk processor in the UK.

This morning (16 January), it was confirmed that Müller had made a GBP280m bid to buy Wiseman. The Wiseman board has backed the bid, investors representing over 54% of the company's shares have indicated they will accept the offer (including First Milk, the UK dairy co-op that owns 10.1% of the group) and executives at both companies were talking up the benefits of the deal.

"The combination of Müller and Wiseman makes strong commercial and strategic sense," Wiseman executive chairman Robert Wiseman said.

"This is an exciting strategic move by Müller to enter a new market segment in the UK. The combination of these complementary businesses will form a leading dairy player," Müller CEO Heiner Kamps claimed.

The German firm outlined the benefits of the deal - the "complementary" nature of both companies' product portfolios, increased scale, a "platform to enhance efficiency".

Preben Mikkelsen, of Denmark-based global dairy analysts PM Global Dairy Consulting, admitted he was "a little surprised" at news that Müller had decided to buy Wiseman but outlined the potential benefits for the German firm.

"By acquiring Wiseman, Müller will get access to a substantial part of the UK milk sector with the aim of rationalising the processing and business operations," Mikkelsen said. "[Müller] will increase their position towards the retail chains but also improve their position in relation to especially Dairy Crest and Arla Foods."

Elsewhere, analysts at Shore Capital, speculating about the possible rationale of Müller's move for Wiseman, noted potential improvements in milk procurement and collection.

However, despite the claims of the deal's benefits, there is no doubt that Müller is set to enter a challenging market segment. Increased competition, volatile commodity costs and demands from retail customers have all put pressure on profits in the sector in recent months. 

In Wiseman's last financial year, which ran until 2 April, its profits fell by nearly a quarter. The year saw all major UK retailers put their contracts out to tender, with processors having to bid aggressively for business. Milk is often used as a loss-leader by supermarkets to bring in customers and, with retailers competing fiercely, processors often face demands on price that put pressure on profits.

It will be a tough new segment for Muller. Charles Hall, head of research at brokers Peel Hunt, played down the benefit to Muller of having a wider range of products in its portfolio. "I'm not sure it gives them a lot more clout with retailers. It's different categories with different buyers. I don't think you can bully retailers just because you can do yoghurt and milk," he says.

Milk, resin and fuel costs have also weighed on Wiseman's earnings. In November, Wiseman said profits for the first half of its current financial year dropped 41%. Commodity costs - even if they do come down from last year's level - remain volatile. Müller pointed to the efficiency gains that it sees from the Wiseman deal but not everyone is convinced.

"The synergies are pretty limited," Hall argues. "They are not going to be able to buy the milk any cheaper. There will be a bit of head office cost savings [but] I don't think there will be any great savings to be had."

Against a backdrop of retail power and volatile commodity costs, profits in liquid milk are likely to remain difficult to generate. Today, Wiseman separately announced that its third-quarter profits could come under pressure if raw milk prices fail to come down or the price it receives for milk does not increase.

Müller's bid represented a premium of more than 59% on Wiseman's share price on Thursday (the day before the companies said talks were taking place). Shareholders in the UK firm are likely to have welcomed the German company's interest with open arms.

It could be argued that Müller is taking a longer term view of the sector and that the yoghurt maker is taking advantage of the current low value of dairy processors to corner a share of the UK milk sector.

Hall suggests Müller may have taken a somewhat pragmatic view when making its bid for Wiseman. "They clearly think the UK dairy sector is under-valued. Looking at the Wiseman business, profits came down sharply but it is still cash generative and profitable. It doesn't need profits to improve that much to be a workable investment in an industry Müller knows reasonably well."

Pragmatism aside, Müller has entered a sector with significant challenges. Commodity cost volatility and retail competition are two pressures that are unlikely to disappear completely.

Shore Capital said the outlook for Wiseman is "reasonably constrained", with trading for retailers remaining "intense" (they pointed to Tesco's plans to invest more in its UK business to revitalise sales) and the potential for capacity in the country's liquid milk sector to grow (with Arla Foods set to build a mega dairy).

It is a deal that will give industry watchers plenty to chew over.