Canadian dairy group Saputo is continuing to examine further M&A opportunities even as it digests recent acquisitions including Australia’s Warrnambool Cheese and Butter Factory and the Atlantic Canada fluid-milk business of Scotsburn Cooperative Services. Katy Askew reports.

Saputo can attribute much of its recent success to a targeted acquisition strategy that has boosted its presence in the US, Canada and further afield in markets such as Australia. And the Canadian dairy giant is hungry for more.

“On the M&A front…we continue to evaluate possibilities. Our balance sheet remains strong and we have the necessary resources to integrate multiple acquisitions at a time,” chief executive Lino Saputo Jr. insisted today (5 August).

Recent acquisitions contributed to Saputo’s strong first-quarter sales and earnings growth, the company revealed earlier this morning. The contribution from new businesses helped offset an increase in input costs and pricing pressure at the firm’s US and Canadian units, the company revealed.

Saputo continued to defend its market share in the competitive Canadian dairy sector as higher ingredients costs offset the positive contribution of volume gains, management told analysts during a conference call.

“The Canada dairies business remains a very competitive landscape,” Mr Saputo observed. “We had to take some measures to ensure we remain competitive… We are defending ourselves well and despite the competition we have maintained and in some cases gained market share.”

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In the US, where the company generates 44% of its earnings, the group faced the “perfect storm” of rising input costs and declining prices across the block cheese and spreads prices – which also devalued inventory – at the same time as cream input prices increased.

In this market, potential acquisitions could boost Saputo’s scale and increase margins, the chief executive said. “Now we have a great platform by which we can consider some other potential acquisitions… the real catalyst for improved margins in dairy foods [US] will come through the next acquisition we do in the dairy foods space.”

The group is also considering further M&A in its international business, where the contribution from the WCB deal boosted earnings in the quarter and helped to offset a sluggish performance from Saputo’s domestic and US units.

According to TD Securities analyst Michael Van Aelst, Brazil could well be the next market where Saputo strengthens its hand through M&A.

Management spent significantly more time… speaking on acquisitions and highlighting that there are plenty of opportunities of various sizes in all of Saputo’s geographies,” he wrote in a note to investors. “We believe that a new platform for Saputo in Brazil may be next in line (as there are two players currently for sale in that market), though the lower profitability of the targets means that they may not be very accretive immediately.”

While Saputo is actively working to identify acquisition targets, the group is also taking a disciplined approach, management stressed.

“Any acquisition that would come across our table in the dairy space is something we would look at… there are a number of reasons why we would not go ahead with an acquisition… We need to have great comfort that we are looking at a synergistic asset and that it is priced correctly,” Mr Saputo said.

According to the chief executive, the valuation would largely depend on issues such as a targets scale and margin structure.

“It all has to do with the type of target we are looking at. Some are highly specialised and branded and generate a good margin, so perhaps we can pay a little premium for [these targets]… We have paid in the past as low as 4x EBITDA, we have paid as much as 12x EBITDA… Today we may not be able to find 4x anymore but I don’t anticipate paying more than 11 or 12x.”