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Dairy groups need to milk takeover market

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Dairy groups wishing to exploit improved market conditions brought by world economic recovery should retain their appetite for acquisitions - which saw the industry's deals double last year.

The rise to 124 in dairy sector mergers and acquisitions last year, from 111 in 2012, reflected the fact that "true organic growth was hard find", with weaker currencies lowering the impact of rising emerging market sales, and revenue rises often down just to passing on high commodity costs, Rabobank said.

"Many battle to avoid margin squeeze," the bank said.

"In an environment of slower underlying growth, mergers and acquisitions are an increasingly attractive route to expanding or defending sales and profits."

'Survive and thrive'

The appeal of deals remain even through underlying growth in the world dairy industry "will pick up as economies pick up".

Growth in developed country markets will not return to the rapid rates seen before the world financial crisis, and without the support from "the rates of economic growth enjoyed in the heyday of the BRICs" – an acronym for Brazil, Russia, India and China.

"In this context, mergers, acquisitions and joint ventures will remain a key avenue to growth and profitability," the bank said.

"Those adept at acquiring and incorporating news businesses into their fold will remain well positioned to survive and thrive in this market environment."

'Starting to become more acquisitive'

The difficulty will come in finding deals with the number, or scale, to significantly improve the fortunes of the large dairy groups which have been fuelling the consolidation wave.

It has been three years since the last dairy mega-deal, the takeover of Italy's Parmalat by French-based Lactalis, with high valuations and the dearth of ready targets restricting activity at this level.

"With 'elephant deals' harder to come by dairy giants will need to acquire or tie-up with more companies than in the past to sustain the same rates of growth in the future."

However, there were signs of continued investment by Western dairy groups in emerging markets, while in Asia, Chinese players are "starting to become more acquisitive", encouraged by a "clear mandate" from Beijing to consolidate.

China Mengniu acquired local peer Yashili last year, besides taking a stake in China Modern Dairy, while Yili bought New Zealand producer Oceania Dairy, and Bright Food bought control of Israel' Tnuva earlier this year.

League rankings

The comments came as Rabobank unveiled its annual league of the top 20 dairy groups, by turnover, headed once again by Nestle, with France's Danone and Lactalis taking second and third place respectively.

Further down the list, Canada's Saputo, enlarged through acquisitions including Australia's Warrnambool Cheese & Bitter, rose one place to eighth, overtaking US-based Dean Foods, from which it bought coffee creamers group Morningstar last year for $1.45bn.

China's Yili rose two places to 10th, overtaking Anglo-Dutch Unilever and Japan's Meiji, which like peer Morinaga Milk, suffered a dent to its revenues in dollar terms from the weakness of the yen.


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