Arla Foods has entered a joint venture with Egypt's leading dairy processor, Juhayna Food Industries, that leaves the European dairy co-operative poised for expansion in a promising emerging market. Expanding via a tie-up with a local company is a smart move from Arla as it works to grow in a market where competition is on the up and M&A valuations are high. Katy Askew reports.
Arla Foods and Egyptian dairy group Juhayna Food Industries have established a joint venture in the African market. Juhayna will control 51% of the new company – called ArJu Food Industries – while Arla will take a 49% stake. The European co-op will, however, be responsible for the daily management of the joint venture. The business aims to begin trading in October and intends to start local manufacturing "as rapidly as possible".
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Arla and Juhayna are a good match. The Lurpak and Castello owner brings its production expertise, experience operating in international markets and brand name to the table while Juhayna offers local and regional know-how.
Their product portfolios are complementary. Juhayna manufactures UHT-milk, yoghurt and juice and has been growing market share consistently over the past five years. However, the company has a limited presence in categories such as cheese, butter and infant formula. Announcing the deal to its shareholders, Juhayna said Arla would bring its expertise in these areas as well as "other potential products".
Juhayna also said the JV will seek out expansion opportunities in other Middle Eastern and African markets.
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"A joint venture with an international player of Arla’s quality gives Juhayna the ability to diversify its product range and geographical footprint at a very rapid pace," said Juhayna chairman Safwan Thabet. "The combination of Arla’s well-recognised brands and Juhayna’s distribution network and regional know-how will allow the new JV to target domestic and export markets."
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By GlobalDataFor Arla, feeding its products into Juhayna's distribution network will enable the dairy giant to access a retail market that remains dominated by traditional and informal sales channels.
Arla's move in Egypt is well timed. The country's economy is rebounding after the instability of the Arab Spring and subsequent regime change. Economic growth is feeding through to higher incomes and increased spending power.
In dairy, per capita consumption is below that of developed markets, sitting at 18 kg per person a year – versus 78kg per capita per annum in western Europe – and that means there is plenty of potential for further expansion.
"Egypt is one of the fastest growing markets for dairy both within the Middle East as well as globally," Pinar Hosafci, an analyst with Euromonitor, tells just-food. "Egyptian dairy sales have grown by over 9% in constant value terms during 2009 to 2014, significantly outpacing global dairy growth 3%. In particular, yoghurt and sour milk products represent a huge opportunity as these products are part of the country’s traditional diet and there is an ongoing shift from unpackaged products towards packaged dairy products, which further Egypt’s appeal [to international manufacturers]."
However, these pull factors mean competition in the market – and to secure entry into the market – is intensifying.
The Egyptian market is fragmented. According to Euromonitor data, around 20 players were present in the dairy sector in 2014. These include the "significant" multinational presence of the likes of Danone, Nestle and FrieslandCampina.
Hisafci says the competitive landscape might make establishing operations organically in the country a daunting task. "This presents a barrier to growth for the interested parties, as the majority of the [multinational] companies have significant investment and marketing capabilities," she observes. Meanwhile local players are very "cost competitive" which could also serve to "limit growth prospects of any parties planning to enter the Egyptian market," she adds.
By joining forces with a leading local player – and with plans to set up local production – Arla has found a means to overcome these challenges and put itself on an even footing with multinationals with a more established presence in the country.
While the financial details of the tie-up between Juhayna and Arla have not been spelt out, it is safe to say Arla has also found a more cost-effective means of expanding in the market than afforded by a straight acquisition.
The appeal of the Egyptian market means that there is greater interest among international dairy manufacturers – as well as local and international investment vehicles – to take control of Egyptian dairy operators. This has pushed up valuations, as evidenced by the high price tag recently commanded in the race to buy Egypt's Arab Dairy Company.
The tie-up with Juhayna comes five months after Arla bowed out of a takeover battle Arab Dairy. India's Paras Dairy and Saudi Arabia’s Arrow Food Distribution were also in the running but – like Arla – withdrew from a bidding process that boiled down to a bidding war between France's Lactalis and local investment firm Pioneers Holding.
Pioneers, which already held a near-17% stake in Arab Dairy, won through with a bid of EGP71.11 per share (US$9.32) for the business. According to Pharos Holding, the investment bank that oversaw the sale, the deal equated to an enterprise value of about EGP601m, reflecting an EV/EBITDA multiple of 38 times.
PM Food & Dairy Consulting's Preben Mikkelsen tells just-food the battle to buy Arab Dairy is an example of the growing cost of entering the Egyptian dairy market via M&A. "Acquisition can be too costly seen in the light of Arab Dairy Company where both Arla Foods and Lactalis stepped down. When Lactalis declines [a takeover attempt] then the price is certainly too high," Mikkelsen said.
Therefore, Mikkelsen says, the establishment of ArJu Food Industries looks like a "sensible solution". He adds: "If the JV is a success, Arla Foods can later on acquire parts of the company."
