Dairy Crest positioned itself potentially to extend the round of consolidation
in the UK dairy industry as it unveiled a $540m deal
to sell its French spreads business to Montagu Private Equity.
The UK dairy group said it had "agreed in principle" to sell
its St Huberts operation to Montagu, whose diverse portfolio also includes the
UK's College of Law, retailer Maplin Electronics and waste group Biffa.
The proceeds of the E430m ($540m, £344m) deal will initially
be used to reduce the Dairy Crest borrowing, a move which Panmure Gordon said
would "virtually eliminate" its net debt.
However, Dairy Crest said that it was stopping short of
buying back loan notes, and entrenching its low-debt position, in order to
retain the financial flexibility to expand its UK foods business, owner of
brands such as Cathedral City cheese and Country Life butter, and its flagging
"Dairy Crest will consider a range of options, taking into
account the interests of all stakeholders," the group said.
Mike Allen, the Dairy Crest chief executive, said that this
could include takeovers, with the funds meaning the group "will be able to
consider a wide range of opportunities, including synergistic acquisitions in
The UK dairy market has already witnessed two major deals
this year, with the takeover of Robert Wiseman Dairies by Germany's Theo Muller
group, while Milk Link has merged into the Nordic-based Arla Foods empire.
The takeovers come against a backdrop of weak margins for
dairy group, which have been stuck between supermarket pressure to squeeze out
lower prices for hard-pressed consumers, and relatively resilient farmgate milk
And, indeed, many investors believe the group will pursue an acquisition further down the value chain, of a branded foods producer.
Milk price cuts?
However, there are signs that the pressure in dairy may be easing,
with dairy farmers braced for a fresh wave of price cuts.
"It is expected that Wiseman this morning will announce a
reduction in the price paid to farmers for raw milk by circa 1.7p," Panmure
Gordon analyst Damian McNeela said.
"We would expect both the other major processors, Arla and
Dairy Crest, to follow suit shortly."
Shore Capital's Clive Black said: "It is our view that
prices could fall further in 2012, much to the chagrin no doubt of dairy
Furthermore, a revival in dairy commodity prices has lifted
prices of the cream produced as a byproduct from skimming milk, and an
important part of processors' revenues, while lower oil costs have cut pressure
on the plastics used for packaging.
Meanwhile, Dairy Crest itself has been attempting to boost
the performance of its dairy business through measures including focusing on
price over volume in sales, and closing two factories, a drive viewed "encouraging"
by Shore Capital.
"The margins remain low, and the returns frankly inadequate
on the capital that is required to compete in the difficult liquid category,"
Mr Black said.
"However, progress is been made to build profits, those
profits may appear more quickly than we first thought."
The sale of St Hubert, which Dairy Crest bought for roughly
£250m in 2007, was welcomed by Panmure Gordon, which lifted its target for the
group's shares to 385p.
"Given the transformational effect on the balance sheet and low
implied rating of the business post completion, we upgrade from 'hold' to 'buy',"
Mr McNeela said.
Dairy Crest shares stood 0.6% higher at 330p in morning
deals in London.