Selling lion’s milk and beverages to Bega Cheese creates a new sizable force in Australian food manufacturing, but rubs a $ 66 million dose of fresh salt into our wounded relationship with China.
China Mengnui Dairy’s more generous $ 600 million offer was blocked by Treasurer Josh Frydenberg in August.
Australia likely hasn’t made friends in Japan either, as Lion Dairy and Drinks is a subsidiary of Kirin from Japan that was forced to leave money on the table and accept Bega’s $ 534 million offer.
Dairy Farmers is one of the key milk brands in the Lion Dairy and Drinks portfolio. Photo credit: Fairfax Media
Kirin said in August, when it became clear that China would not get a Foreign Investment Review Board (FIRB) tick, that it was disappointed with the result, which effectively forced it back to the drawing board.
Another fermenting dispute with China would be the report that FIRB and Treasury had approved Mengnui’s November 2019 offer, but seven months later, Frydenberg had overruled both of them on the grounds of national interest.
Indeed, the refusal to accept the Mengnui Dairy acquisition was responsible for further straining relations between Australia and China.
The latest victim is Australian coal exports valued at US $ 700 million that are now in Chinese ports with no unloading permission.
This diplomatic covert trade war has already affected goods and services from lobster to wood and from barley to wine, meat and education.
After Mengnui was out of the running, the auction for Lion’s impressive portfolio of milk and juice brands was fierce. Over the past few weeks, Bega has beaten Canadian dairy giant Saputo and assistant asset manager Tanarra in a desperate battle for the payline.
The result, which consolidates control of an Australian company over a large part of food production, undoubtedly fits well with Prime Minister Scott Morrison’s post-COVID desire to increase local food production.
But it means a lot more to the Empire Building Bega, barely digesting its most recent acquisition – the $ 460 million deal to acquire a group of brands including Vegemite in 2017.
China’s loss is a coincidence for Bega, which probably had its hands full when Lion Dairy and Drinks first went on sale in 2019.
Bega’s winning offer has catapulted the company into the big food league. In addition to peanut butter and vegemite, existing merchandise also included numerous traditional cheese products for which it is best known, as well as numerous dips, dressings, and mayonnaise.
The Lion acquisition adds milk, juice and yogurt brands – Dairy Farmers, Pura, Farmers Union, Daily Juice, and Big M and Yoplait. The Lion assets also bring national manufacturing capabilities and Australia’s largest cold chain distribution network with them.
It’s no surprise that the Bega deal brings significant synergies of $ 41 million per year given the free branded ranges.
Bega bought $ 1 in sales. 6 billion and earnings before interest tax write-offs of 56 million US dollars – and that without taking synergies into account. The result is a company with $ 3 billion in sales and a company with more effort to negotiate with the major supermarket chains whose extensive branded products compete in many of these categories.
Despite the positive response from investors, the acquisition of Bega involves risks due to its size. The company’s market cap prior to the deal was just $ 1 billion – the purchase is a big bite for a company of this size.
After three days of banning Bega from trading, Bega announced the terms of its $ 401 million capital increase – set at 7. 6 percent discount on the theoretical ex-rights price and 9. 1 percent discount on the current share price.
Bega will therefore benefit from achieving the targeted cost reductions and a double-digit increase in earnings per share in 2022.
The company has also given assurances that it will use its cash flow to reduce debt and return to a more conservative leverage ratio.
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Bega Cheese, Lion Dairy & Drinks, Kirin Holdings Company, Lion, Dairy Farmers Pty Ltd, Australia, Drink
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