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  1. Analysis
June 4, 2010

In the spotlight – Sodiaal’s pursuit of Entremont

Could we, after almost a year, be set to see Sodiaal acquire French dairy peer Entremont Alliance - and, as a consequence, create one of Europe's largest dairy processors?

By Dean Best

Could we, after almost a year, be set to see Sodiaal acquire French dairy peer Entremont Alliance – and, as a consequence, create one of Europe’s largest dairy processors?

Sodiaal’s pursuit of Entremont Alliance has seen government intervention, opposition to a rival bid from industry heavyweight Lactalis and tense discussions over the debts that stalled the deal.

Yesterday, Sodiaal announced that it and Entremont had signed a “draft agreement” on a takeover. Sodiaal, the company behind the Candia brand, is set to acquire 100% of Entremont Alliance from Unifem, a holding company controlled by Belgian financier Albert Frère.

A source at Entremont was keen to underline that it was “not yet a done deal” but the announcement of a draft agreement is a significant sign that a transaction is close, especially after 11 months of speculation over the business.

Entremont first revealed interest from Sodiaal last July when it received a joint bid from the Candia maker and cheese maker Bongrain.

Lactalis, one of the world’s largest dairy groups, went public with its interest and started its own talks with Entremont.

French trade union representatives outlined their opposition to the prospect of Lactalis acquiring Entremont, citing regulatory issues. One union official told just-food that a deal would create a “monopoly” in the French market for emmental. 

In September, Sodiaal on its own entered exclusive negotiations with Entremont. The up-and-down nature of Sodiaal’s pursuit became clear at the end of November when that period of exclusivity elapsed. A week before Christmas, Lactalis then submitted an offer for Entremont.

But, on Christmas Eve, just-food reported that exclusive talks between Entremont and Sodiaal had re-opened. Entremont’s owner said it favoured a deal with Sodiaal, which proposed to take a majority stake in the enlarged business and allowing Frère to keep a shareholding.

By February, however, Sodiaal had tabled an offer to buy the whole business, although as recently as last month, the company’s bid for Entremont had stalled over a disagreement on how to service the group’s debts. At the end of February, Entremont’s debts were estimated at over EUR335m.

Yesterday, however, marked a significant step forward. Details of any agreement on those debts are sketchy, although reports in France have suggested that Entremont’s banks had agreed to transform EUR70m of debts into ten-year convertible bonds. This, however, has yet to be confirmed.

Nevertheless, should Sodiaal and Entremont seal the deal (employee representatives on both sides meet to vote on the agreement later this month), the new entity would create Europe’s number four dairy processor, only behind the likes of Lactalis and Dutch dairy giant FrieslandCampina.

A deal would continue a trend of consolidation within France – and mark another piece of major M&A in Europe ahead of the EU’s plans to scrap dairy quotas in 2015.

In France, four dairy co-operatives operating in the east of the country decided to merge and create a “powerhouse” in that region, particularly in cheese.

Looking at the European context, a deal between Sodiaal and Entremont would be the biggest in the dairy sector since the merger between Dutch groups Friesland Foods in Campina in late 2008.

The financial crisis put paid to any further consolidation in the sector but Arla Foods, for instance, has repeatedly signalled its intention to be part of further deals, particularly in northern Europe.

Despite the downturn drying up the finance needed to drive larger deals – as well as leading to companies focusing inwards rather than out – consolidation in dairy is seen as inevitable.

With the EU scrapping quotas in five years time, Europe’s dairy processors will be able to produce more to export to the world’s emerging markets – and some companies see increased scale as vital in serving those markets.

Sodiaal already has an international presence through its Candia brand, its stake in yoghurt maker Yoplait and milk powder business Regilait.

However, a deal with Entremont will give the company the scale to build its international business and the raw product to serve export markets.

Entremont is building its exposure to international markets; last month, the company said it had signed a major contract with an unidentified Chinese food group to supply it with 40,000 tonnes of powdered milk annually for a period of ten years.

The volume is the equivalent of 450m litres of milk annually – 25% of Entremont’s current yearly output.

Creating a larger company would also give the new entity the resources to invest more in value-added dairy products. Both businesses have significant interests in more commodity-type products like butter. A bigger company will be able to invest in value-added products – crucial when operating in Europe’s stagnant dairy markets.

The rollercoaster nature of Sodiaal’s pursuit of Entremont means its bid could still turn sour. However, the dynamics of the dairy sector in Europe means a deal is vital for both companies to be able to milk future growth.

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