The news that Dairy Crest is mulling the future of St Hubert, its branded spreads business in France, has garnered a mixed reaction from the City.
The UK dairy company’s announcement this morning (9 March) of a strategic review of St Hubert was met with surprise by some analysts, as the unit represents 30% of group margins. For others, the news was less surprising given Dairy Crest’s inability to make strategic and bolt-on acquisitions in St Hubert’s market and the constraints imposed by the company’s debt levels.
Most, however, applauded the review that will allow Dairy Crest to generate greater value for shareholders, reduce its debt, and help the firm invest in its core business and make strategic acquisitions of branded businesses in the UK. In turn, shares climbed 4.42% to 340.50 pence.
For Shore Capital analyst Clive Black, the review is most likely to revolve around the disposal of the business, which it acquired from Uniq in early 2007.
“Quite what sort of offers Dairy Crest will receive remains to be seen but we do see the case for St Hubert to be considered a prized asset with its good growth potential, handsome trading margins (circa 30%) and aforementioned market positions.”
Dairy Crest’s French spreads business represents around 30% of group EBITA and has the highest margins of its units. Since the acquisition, St Hubert’s revenues and margins are believed to have expanded.
Investec analyst Nicola Mallard believes Dairy Crest was unable to add to the St Hubert business due to the financial crisis. “[Dairy Crest] bought St Hubert five years ago with a view to using it as a bridgehead into Europe and that we’d expect to see a few more deals around it,” she told just-food. “Sadly, just after they bought it the market took a real aversion to high debt levels and they’d left themselves with high debt after making this acquisition. They were kind of hamstrung in terms of being able to do anything more from a financing point of view.”
Mallard believes that the lack of any additional deals has left the unit in “splendid isolation”, geographically remote from the rest of the group.
The Investect analyst said she could see the argument for both keeping the unit and selling.
“You can kind of see the logic involved in selling it, particularly as it’s had a good run of profitability and market shares have gone up nicely.”
However, the downside of any sale, Mallard says, is that Dairy Crest would be losing the most profitable business it owns.
“It makes somewhere close to 30% margins, which is pretty rare for a food company,” she tells just-food. “A lot of people have described it as the crown jewels. The risk of selling it is that [while] it will bring in quite a bit of funding, we’re guessing it will reduce their net debt to GBP50m … but could they replace the quality of earnings?”
And, with Dairy Crest’s UK dairies division facing challenges, some have questioned whether the company should be considering a sale of St Hubert.
Damian McNeela of Panmure Gordon believes the possible disposal at a time when the UK dairies business is under so much pressure comes as a surprise.
“We maintain our ‘hold’ recommendation and 350p price target until we have a clearer picture of how Dairy Crest’s UK portfolio of brands will look going forwards. Current trading is doubtless difficult in UK dairies with lower cream and higher diesel and HDPE costs since the start of the year but the company has maintained its guidance for FY 2012E.”
In a trading update last month, Dairy Crest described trading in its dairies unit as “difficult”. High milk purchase prices and lower cream realisations are expected to have hit profits when the company publishes its full-year trading update on 29 March.
Black also remains cautious about the firm’s dairies division. “Profit margins across the industry have crumbled across the board for well-versed reasons and the outlook is far from rosy to our minds. The doorstep business faces structural challenge, the supermarket environment is tough and input price pressure does not seem to be dissipating.”
However, Black said a sale could improve Dairy Crest’s financial position and allow it to look at the future of the rest of the business with greater certainty.
“Whilst there is work to do in UK dairies, we believe that with a materially strengthened balance sheet management can secure the dividend stream and think about next steps without the pressure of leverage,” Black said.
Potential suitors for St Hubert could include Lactalis and Arla Foods, according to Black, who believes there will be “considerable interest” for St Hubert given its leading market position.
There is, however, uncertainty about the type of asset Dairy Crest could then add to the business. “They have said they’re looking at UK branded,” Mallard told just-food. “There’s no way the market would accept them buying an own-label business and replace St Hubert with that, but we’re struggling to think of the obvious choice. We’ve just got to wait and see.”
With an announcement expected in around three months time, the industry will now be left waiting to see what interest Dairy Crest’s French spreads division garners and whether the firm can get the price it wants for the unit.