Parmalat unveils second Brazil deal in two weeks

Parmalat is close to winning the auction for the Brasil Foods dairy business in its second announcement within two weeks over an acquisition in the tough Brazilian market.

Italian-based Parmalat, controlled since 2011 by France's Lactalis, said it had signed a "binding memorandum of understanding" over purchasing the Brasil Foods assets for R$1.8bn ($805m, E610m), on a debt and cash-free basis.

The deal comes six months after Brasil Foods announced it was selling its dairy division, with the auction reportedly attracting interest from 14 suitors, including France's Danone, Swiss-based Nestle and Grupo Lala, Mexico's top milk processor.

For Parmalat, the purchase of Brasil Foods assets including 11 dairy plants and a host of brands follows the announcement last month that a R$250m ($110m, E83m) offer for the UHT milk and cheese operations of Lacteos deo Brasil, which filed for bankruptcy protection last year.

Tricky market

Indeed, the Brazilian market, while fast growing, has proved tough as rivals compete for milk, leaving processors struggling to pass on milk prices which, as in many other countries, proved strong last year, rising last October to a record R$1.12 per litre.

This year, margins have come under pressure by a move from Brazil to generating a milk surplus at a time when markets are amply supplied, after ramp-ups in production in the likes of Europe and New Zealand.

Brazil in February registered a net surplus in its dairy balance for the first time in five years, according to Rabobank, yet milk prices have stabilised at around R$1.00 per litre according to research institute Cepea, showing a smaller decline than in many other countries.

The pressures have, for instance, left shares in Vigor, the dairy group spun off from JBS in 2012, down one-third so far this year.

The Brasil Foods dairy division saw high milk prices lift its costs by 19.3% last year. However, sales rose by a more modest 3.5% to R$2.8bn, as an attempt to pass on the higher costs, through an increase of 24% in prices, prompted a 15.4% drop in volumes.

Second rank?

Dairy was also the one market in which Brasil Foods has a relatively small market share, of 10.8%, compared with more than 50% in many of its main food markets.

The group ranks third in Brazilian dairy, behind Nestle and Danone, although it is believed that Parmalat, which already had some assets in the country, may now take second place.

Last year, Parmalat bought Brazilian gourmet cheese maker Balkis for $30m.

Parmalat shares stood 0.1% lower at E2.524 in morning deals in Milan.

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