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  1. Analysis
March 13, 2012

Deal or no deal: Dairy Crest eyes UK acquisitions

Last week, Dairy Crest announced that it is considering the sale of its French spreads brand, St Hubert. In a move that raised some eyebrows in the investment community, the group indicated that it could use some of the proceeds to fund future acquisitions. Katy Humphries takes a look at which potential deals might pique Dairy Crest's interest.

Last week, Dairy Crest announced that it is considering the sale of its French spreads brand, St Hubert. In a move that raised some eyebrows in the investment community, the group indicated that it could use some of the proceeds to fund future acquisitions. Katy Humphries takes a look at which potential deals might pique Dairy Crest’s interest.

Dairy Crest is shaking up its French spreads business and considering saying au revoir to its St Hubert division.

The unit was purchased in 2007 and has since proven one of Dairy Crest’s most profitable businesses.

St Hubert manufactures France’s top-selling spreads brands – Cholegram, Le Fleurier and Omega 3. It accounts for 36% of the French spreads market and has consistently grown profitability and market share under Dairy Crest’s ownership. It also generates a hefty 30% of group EBITDA.

However, a spokesperson for Dairy Crest told just-food that when the unit was acquired the company had envisioned making further bolt-on acquisitions in continental Europe, which would allow it to grow profitability by exploiting synergies. These acquisitions have failed to materialise.

“As a mid-cap food group, acquisitions must be synergistic. This has not been the case in continental Europe,” the spokesperson emphasised.

Therefore, Dairy Crest suggested, greater value for shareholders might be generated by considering “all of the available options for St Hubert”.

Analysts at Panmure Gordon have valued St Hubert at between GBP350m (US$550.9m) and GBP400m.

According to Dairy Crest, proceeds from any sale could be used to reduce the group’s debt, which would cut its interest costs and increase its attractiveness to investors who harbour concerns over the level of debt within the business, which currently stands at 2.4 x net debt to EBITDA.

The company said that it could also release some proceeds to shareholders. This would likely come in the form of a special dividend or share buyback programme.

Dairy Crest also indicated that it would use some of the funds to drive growth. This would be achieved by investing in its core UK dairy business and through further acquisitions of branded businesses in the UK. Such acquisitions, Dairy Crest insisted, would offer synergies with its existing business.

“This would further improve Dairy Crest’s strong position in the consolidating UK dairy market. Any acquisitions would be synergistic and made within strict financial criteria,” the company said.

Dairy Crest is a power-player in the UK’s spreads, liquid milk and cheese categories and owns a number of top-tier brands, including Cathedral City, Clover and Country Life.

As such, the control of additional brands in these categories could only add to the considerable bargaining power Dairy Crest brings to the table in negotiations with the country’s supermarkets. 

According to Shore Capital analyst Clive Black, the firm is most likely looking to expand in the cheese or spreads categories.

To spot potential takeover targets, “you just need to walk the aisles of Britain’s supermarkets and have a look at the brands in the butter, spreads, margarine and cheese cabinets”, he told just-food.

The focus on cheese and spreads reflects Dairy Crest’s profit mix.

Dairy Crest reported an increase in operating profit, including exceptional items, of 4.7% to GBP46.8m for the half year to 30 September 2011. However, this was due to growing profits from its spreads and cheese segments. Profits from the dairies segment, which consists of liquid milk, cream and milk powders businesses, fell by 46.8% to GBP5.8m for the half year, including GBP4.6m profits achieved from property sales.

In the wider UK market, the cheese sector has proven particularly resilient in the face of difficult economic conditions. According to figures from industry body Dairy Co, total cheese expenditure increased by 5.9% to GBP2.6bn in the year to 25 December 2011. The average price of a kilo of cheese has increased by 3.8% to GBP6.26/kg while volume sales increased by 2% year on year.

Meanwhile, a squeeze on prices coupled with rising input costs means that liquid milk is a less attractive category for branded manufacturers. The strength of supermarkets own-label sales, as well as the fact that liquid milk is often used as a loss-leader, serve to drive the price of liquid milk down and mean that, even as sales volumes in the category have risen in recent years, value sales have declined.

While Dairy Crest may remain focused on its core categories and look for acquisitions in spreads and cheese, it is also conceivable that the group could move to expand in related sectors, reducing the risk of sales cannibalisation and increasing its reach as a broad-based dairy business.

“Ambrosia will be mentioned in despatches as will Yeo Valley whilst brand creation, licensing agreements and maybe some speciality brands may also be considered,” Black added.

Panmure analyst Damian McNeela concurred that Premier Foods plc’s Ambrosia brand “could make sense” and also noted that organic yoghurt maker Yeo Valley has been cited as a possible takeover candidate. However, he added: “There aren’t too many other targets that spring to mind”.

McNeela said it was also hard to predict the size of any potential acquisition. “It’s difficult to say on the size of the deal as Dairy Crest could look at a number of small acquisitions or one large one,” he told just-food.

Regardless of the scale of any potential deal, with one of the UK’s largest dairy companies mulling whether to sell-off a non-core business in order to build up a war chest that would be used to expand its UK business, it seems that we could be in for further consolidation in the UK dairy sector.

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