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Muller buys Dairy Crest dairies, in UK sector mega-merger

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The consolidation in the UK, and indeed European, dairy sector took a major step forward when Germany's Theo Müller group bought Dairy Crest's dairy division, its second major British acquisition in two years.

Theo Müller agreed to pay £80m in cash for the Dairy Crest dairy business, which processes and delivers some 1.3bn litres of milk a year to major UK supermarkets, besides own brands such as FRijj flavoured milk and selling bulk butter and milk powder.

The acquisition means Theo Müller, which purchased Robert Wiseman Dairies in 2012 for £280m, has now bought both of what were once the UK's top dairy groups, and keen rivals

Indeed, buying both Dairy Crest and Robert Wiseman Dairies would have been unthinkable on regulatory grounds a few years ago, before dairies were squeezed by the rise in milk prices, lifted by growing costs of the likes of feed and energy, which the groups struggled to pass on to major supermarket customers.

'Unsustainable dynamics'

The deal, which will merge Dairy Crest with a Theo Muller operation boasting a 30% share of the UK fresh milk market, is still subject to approval by antitrust authorities.

However, Ronald Kers, chief executive of Müller UK & Ireland Group, cautioned over the threat to the UK market without further consolidation.

"We are concerned that the dynamics of the UK fresh milk market are unsustainable for dairy processors in the mid to long term," he said.

Other UK dairy tie-ups include the 2012 merger of Milk Link into Arla, the Nordic-based dairy giant.

Into the red

Dairy Crest revealed its dairy operations ran at an operating loss of £4.4m in the April-to-September half, despite £7.5m in contributions from a programme of selling closed depots.

"Despite the strong growth of… FRijj, increased property sales and cost reductions, lower commodity realisations and a significant divergence between cream revenues and farmgate milk prices have resulted in losses in our dairies operations," Dairy Crest said.

The sale of cream produced by milk processing is a major determinant of the division's operating fortunes.

Theo Müller has included in its proposal a clause allowing it to pull out of the deal "should there be a material deterioration of more than £20 million in the agreed level of profitability" at the Dairy Crest dairy business.

Analysts at Shore Capital believe that, with Dairy Crest having joined other processors in cutting milk prices to farmers, the dairy business will be "broadly breakeven" in the October-to-March half, the second half of Dairy Crest's financial year.

'Material cost savings'

Müller UK & Ireland said the deal would provide "an opportunity to achieve material cost savings and efficiency improvements" through merging its existing operations with those of Dairy Crest, which has already itself started a long-term programme of cutting expenses and merging operations.

"Bringing the two dairy operations together will enhance the merged business's ability to compete and will ensure that customers continue to receive quality products at low prices," Theo Muller said.

Dairy Crest chief executive Mark Allen said: "The combination of our dairies operations with those of Müller Wiseman Dairies will create efficiencies and economies of scale that will help to create a more sustainable UK dairy sector that is better placed to compete on the global stage".

The deal will "provide a platform for higher investment in production efficiencies" which could lead to higher exports of UK dairy products, Müller UK & Ireland added.

The UK, while to a lesser extent than Ireland, is seen by some analysts as having the potential to raise its dairy output following the elimination of European Union production quotas next year.

Heiner Kamps, head of the Theo Muller group, said the deal came at an "exciting time in our further development as an international fresh food company".

Focus on cheese

For Dairy Crest, the divergence of the dairies business will allow it to focus on its higher margin, branded products, such as Cathedral City Cheese and Clover butter.

"The disposal will allow Dairy Crest to focus on continuing to grow our successful and innovative branded cheese and spreads operations," Mr Allen said, adding that the group would "deliver additional added value sales through our whey investment", undertaken in a deal with New Zealand dairy giant Fonterra.

The deal was welcomed by Dairy Crest investors, who sent shares in the group 9.6% higher to 467p in morning deals in London.

By Agrimoney.com

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