Monday 30 November 2020
Our pick of the week’s biggest stories affecting markets
IN FOCUS: BEGA CHEESE BUYS LION DAIRY
What’s going on?
Bega Cheese this week acquired Lion Dairy and Drinks for $534 million. It’ll mean Bega moves into fresh milk, flavoured milk, yoghurt and juice alongside its traditional dairy business. The company will be taking over a suite of well-known brands like Big M, Farmers Union, Dairy Farmers, Pura and Yoplait as well as Juice Brothers, Daily Juice and Dare.
The deal means Bega will be Australia’s second-biggest dairy company, processing 1.7 billion litres of milk a year. Canadian giant Saputo is the largest at 2.6 billion litres and Fonterra comes in third at 1.5 billion.
It’s hoped the business will now make about $3 billion in annual revenue – more than doubling the group’s revenue. It will also mean the company’s earnings channels will be more diversified; Bega’s export business will grow to about $500 million in revenues, with cream cheese being sent to Japan, as well as fresh yoghurt and powdered milk for infant formula to Asia.
To pay for the acquisition, Bega Cheese is doing a capital raising at $4.60 per share to raise around $400 million representing a 9.1% discount to its last traded price. Investors are bullish, Bega shares were up 7.5% on Friday by 2pm AEDT after four days in a trading halt. The deal is set to be completed in January.
What’s the backstory?
Bega is one of Australia’s most enduring brands, and has been around since 1899. In recent years Bega’s been gaining ground, most noticeably with a $460 million acquisition of Vegemite and peanut butter from Mondelez International.
Bega had thought they’d missed out on Lion (owned by Japanese brewer Kirin) with China’s Mengniu Dairy almost successful in taking over just last year, but thanks to current trade tensions with China, Treasurer Josh Frydenberg vetoed the sale leaving Bega in the box seat.
Bega went up against the Saputo and a consortium spearheaded by Australia group Tanarra Capital, and came out the winner. It looks like a good deal – $534 million is a steal compared to the $2.9 billion Lion paid for the dairy when it acquired National Foods back in 2007 and it’s $66 million less than what Mengniu was willing to pay.
What does it mean going forward?
It gives Bega a much stronger presence in the Australian industry. More strong brands mean more shelf space in supermarkets, and that means the company will be better positioned to deal with Coles, Woolworths and any other retailers. With Lion out of the picture, the acquisition also means Bega now has one less direct competitor.
A big plus out of this is a greater number of Bega branded products for the company. Before the Vegemite acquisition, Bega’s brand products portfolio made up only 20% of its business. Pre-takeover it’s at 59%, after the takeover, it will be at 70%. Chairman Barry Irving says this is “crucial in delivering better returns for shareholders over time.”
It’s not all a bed of roses though, Bega is under pressure to deliver on its $40 million a year cost-saving targets after spending half its market capitalisation on the deal. There are also the usual risks when it comes to a major acquisition: potentially paying too much, poor integration and execution, not realising the expected synergies (i.e. two companies with complementary strengths and weaknesses coming together) and new business risk – according to Morgans analyst Belinda Moore in a note to investors.
It also means more exposure to a highly cyclical market: dairy. Bega Cheese will increase its milk intake by 75 % from 955 million litres to 1.7 billion litres annually.
For Lion it marks the company’s exit from the dairy business, now focusing on beer and seltzer. Lion has a large portfolio of beers including XXXX, Tooheys and Little Creatures.
In Brief:
AMAZON PHARMACY LAUNCHES IN THE U.S.
Like it says on the tin, people in the USA can now buy prescription medication online from Amazon and get it home-delivered as of this week. The company’s been looking at getting into the space since at least 2018, so this hasn’t been rushed through due to Covid, although it does look like a particularly savvy move launching during a pandemic.
It’s not just America that could be getting Amazon Pharmacy – Amazon’s already filed an Australian trademark for Amazon Pharmacy in January this year. Due to the nature of Australia’s highly-regulated pharmaceutical industry, which is completely different from how America’s works, it’s unknown how successful the venture could be. We have rules over who can own pharmacies and how much drugs can cost, which means Amazon likely wouldn’t be able to mark-up drugs in the same way they can in the US.
IOOF FACES BACKLASH OVER MLC ACQUISITION
IOOF, an Australian financial services company, held its AGM last week which was characterized by investors’ displeasure over the acquisition of the National Australia Bank’s MLC Wealth franchise for $1.4 billion.
The takeover meant IOOF became the nation’s largest provider of financial advice, with IOOF’s pool of managed funds more than doubling from $202 billion to $510 billion. The acquisition was also made in part to help simplify IOOF’s portfolio and rebuild trust with consumers following the Hayne inquiry.
But investors aren’t happy; the IOOF share price has fallen by 11.7% since the announcement of the deal on 31 August, primarily over criticism IOOF has paid too much. Two of the company’s directors suffered swings against their reappointments over the issue: Elizabeth Flynn, sustained a 24.8% vote against her, John Selak a 17% vote opposing his re-appointment.
GETSWIFT WANTS TO HEAD TO CANADA
Getswift is a company that optimizes delivery routes for couriers and transport companies. At the moment, the Australian arm of the company wants to be sold to the Canadian arm but Treasurer Josh Frydenberg could block the move.
Essentially Getswift has been hit with a number of lawsuits and class actions in 2018 over misleading announcements about partnerships. The Treasurer sent a letter to the frim saying ‘the proposed acquisition would be contrary to the national interest at this time due to there being ongoing legal matters’. But Getswift’s board says the letter is a “preliminary view and not a final decision”. Whatever happens, investors don’t seem too happy, after the announcement shares plunged to 27c. It’s a far cry from Getswift’s heyday – back in 2017, the company was trading as high as $4 on the ASX.