Bel needs to look more M&A, industry watchers say

Bel needs to look more M&A, industry watchers say

French cheese giant Bel Group has made a rare acquisition in an emerging market with a deal to buy a majority stake in Safilait, the third-largest dairy company in Morocco. Bel has not been as active as some rivals in expanding in the world's faster-growing dairy markets through M&A and Dean Best looks at whether the business should be doing more.

Bel Group, the owner of brands like The Laughing Cow and Boursin, is a company with products distributed in 130 countries and is among the world's largest producers of processed cheese.

However, set against that presence is the view Bel needs to follow rivals such as Lactalis and Arla Foods and use M&A more often to further build their operations in regions like Africa, Asia and Latin America.

Two weeks ago, Bel announced it had made a move, acquiring a majority interest in Moroccan dairy group Safilait from private-equity firms Fipar Holding and Sopar.

Looking at Bel's recent record, it was a rare transaction. Its only acquisition this decade was a move two years ago to buy Spanish cheese brand Tranchettes. Bel announced a flurry of deals in 2007 and 2008, including two acquisitions in the Czech Republic (although it sold one of the assets in 2010), one in Ukraine and a joint venture in Iran, as well as the notable move to buy Boursin from Unilever for EUR400m.

Safilait, of which Bel will own just short of 70%, is the number three dairy group in Morocco, behind Danone-owned Centrale Laitière and local co-op Copag. It is a business that specialises in fresh and UHT milk, as well as fresh dairy products, through its Jibal brand. Safilait has, Bel said, seen "robust business growth over the past several years".

In a statement, Bel chairman and CEO Antoine Fievet said the move "fully meets" the company's "strategic growth objectives". He said: "Bel is proud of its success in Morocco, built with the help of long-time local partners."

However, beyond the statement, it is hard to know exactly why Bel has moved to expand on its position in Morocco. When approached for further comment from just-food, the company said it "will not be able to comment further, as we are waiting for the finalisation of the agreement".

Bel and Safilait hope to close the deal in the third quarter of the year after securing anti-trust approval and an all-clear from the country's government over the stake held by Fipar Holding.

Euromonitor analyst Lianne van den Bos says Bel has stated it wants to organically expand in countries in which the company is already present and believes a move to buy a business in an existing market fits that focus.

"They say in their annual report their strategy is to mainly look at markets where it's already present and trying to build up what they have there and trying to either come up with new brands, more brands or launching new flavours," she says. "If you are looking at Morocco, they are a stronger leader there when it comes to cheese. In this case, it's quite logical for them to stay in Morocco."

However, although van den Bos says Morocco has a growing dairy market, she indicates the rates of growth in parts of the sector compare unfavourably with other regions.

Euromonitor has forecast Morocco's milk retail sales will grow at a compound annual growth rate of 1% in the next five years, compared to "almost 4%" in the wider Middle East and Africa as a whole, van de Bos notes. The country's yoghurt sales will also grow at a 1% CAGR, versus 7% for the region and over 4% for the global market, she says.

"It's a safe bet to focus on Morocco and try to expand here and build on the distribution network they already have but the growth rates aren't too good if you compare that to some of the other regions."

Bel already accounts for 40% of Morocco's cheese market, according to Preben Mikkelsen, who leads Denmark-based dairy analyst firm PM Food and Dairy Consulting. From a plant in Tangiers, the company sells its cheese brands The Laughing Cow, Les Enfants and Kiri in the country.

Buying a business like Safilait, with its focus on milk and fresh dairy, represents something of a departure from Bel's previous cheese-centred acquisitions and, at face value, could put the business in direct competition with Centrale Laitière.

However, Mikkelsen plays down the prospect of fierce rivalry with Safilait's two larger competitors. He argues Bel will use Safilait as a way of to build on its local cheese business and suggests the French group may have ambitions further afield.

"There is no doubt about it that Bel will expand cheese production. They already have cheese production in Morocco but they'll use this platform to I think establish a new cheese production facility in Morocco," Mikkelsen says. "Bel will not open up huge competition with Danone or Copac. They will use this as a platform and you should also see it as a sourcing place for producing for the whole region. They also have production in Algeria and Egypt but this can also [lead to] further penetration down into the African continent ... which will be quite interesting in the next 20 years because you have the dairy markets emerging in several places in Africa."

Could the deal signal Bel is ready to make further acquisitions in emerging markets? Mikkelsen says Bel has, in recent years, undergone internal changes that mean it is less now "a closed French company" and one that is more "modern", adding: "I think they have used a lot of effort internally and now I think they'll be offensive externally because they are ready."

And there is the feeling Bel needs to be ready. "I would say [this deal] is about time," van den Bos says. "It does make sense for them to start purchasing brands or companies in emerging markets but it's a little bit too late if you compare them to Lactalis and Arla. They've made huge investments, especially Lactalis in Latin America and Arla likewise in the Middle East and Africa."

Bel did see sales grow in 2014, up 3.3% at EUR2.78bn. Its business in what it calls the "near and Middle East" saw sales rise almost 12%, its revenue from its Greater Africa arm - its smallest division - increased 5.8%. Sales in Europe were mixed, with its north-east Europe unit seeing sales slide 7.5%, affected by the crisis in Ukraine and also by a "tough business environment prevailing in some of the region's markets, notably in Germany". However, Bel achieved robust growth in western Europe, with sales up over 4%. Meanwhile, sales from its combined Americas and Asia Pacific rose just over 2%.

Mikkelsen says Bel "will have to" look for more M&A opportunities in emerging markets. "Bel has some eminent products for, let's say, Asia. I've been wondering why they didn't make any significant moves in Asia because if you look at comparing populations to consumed cheese then La Vache Qui Rit, Babybel and all these kinds of processed cheese are the best way because you don't get Chinese people to eat mature, European cheese. Bel could have strong brands for developing these markets."

Van den Bos believes Bel is "really trying to push for Asia Pacific". She adds: "To me, that makes sense, because especially processed cheeses are likely to do well in countries like China as cheese is not really much of a custom in their diets."

However, she points to Latin America - due to the growth seen in some cheese sectors in the region - as a market Bel should target. Speaking to just-food last month, Arla executive vice president Finn Hansen cited Mexico and Brazil as two key target markets for the Castello owner.

"My question is: why aren't Bel expanding into Latin America, which is a booming market when it comes to cheese?" van den Bos wonders. "We've seen quite a few companies trying to invest there. It makes sense for them to go to Morocco but it's a bit too conservative. They are showing solid growth, or solid performance in western Europe - but western Europe is a mature market and there's not much growth there, so they are going to lag behind companies that are investing in emerging markets, such as Lactalis and Arla."

Nevertheless, van den Bos does note the deal in Morocco could be a way for Bel to size up similar opportunities elsewhere. "It's interesting to see they are now expanding in the dairy category, looking into milk and yoghurt. It might be a testing phase. In Morocco, they've got quite a good set-up there and, maybe based on that, they might expand into other markets as well. It's quite conservative but it's a good testing ground."