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Dairy Crest 'could be takeover target' after dairies sale

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The sale by Dairy Crest of its dairy division, which looks "increasingly likely" to win regulatory clearance, could see the rest of group fall prey to an acquirer too, Credit Suisse said.

Credit Suisse hiked to 580p, from 485p, its target price for Dairy Crest shares, on which it lifted its rating to "outperform" from "neutral".

The upgrade reflected the "pretty reasonable" chance that Dairy Crest, the UK's biggest dairy foods company, will itself be taken over, after selling its struggling milk processing and distribution business to German-based Theo Muller.

Although the £80m disposal – of a business with revenues of some £1bn a year – has yet to gain regulatory clearance, Credit Suisse echoed ideas from some other brokers, such as Shore Capital and Numis, of improved expectations for the deal gaining clearance from the Competition and Markets Authority (CMA).

The regulator two weeks ago said that while the dairies deal had a "realistic prospect of a substantial lessening of competition in the supply of fresh milk", there were "reasonable grounds for believing" that concessions made by Muller on processing might win antitrust clearance.

Historical comparisons

Credit Suisse said that the food sector was "awash" with examples of producers becoming more focused, "only to attract the interests of third parties".

Examples include UK confectioner Cadbury, which was purchased by Kraft after shedding its US drinks assets, and US meats group Hillshire Brands, formed from the revamp of Sara Lee only to be bought by Tyson Foods, after a takeover battle with Brazil's JBS.

Dairy Crest would, on disposal of its dairies business, be left mainly as a manufacturer of cheese, its top-earning division, and spreads, with some interest in dairy products such as whey powder too.

"Would the stand-alone spreads and cheese business attract the attention of would-be consolidators?

"Certainly it looks considerably more likely, in our view, post the proposed sale of dairies than it might have done beforehand," Credit Suisse said.

Potential acquirers

The bank's list of potential Dairy Crest suitors included Ireland's Kerry Group, which is proving active in sector deals, amid Ireland's dairy expansion drive following the scrapping of European Union milk production quotas.

France's Lactalis "has been a consistent consolidator in the dairy/cheese industry", with purchases such as Dukat and Parmalat, while Canada's Saputo has also said it is interested in expanding in cheese, albeit in the Americas or Oceania.

It is "worth remembering that private equity, Montagu Private Equity, bought the French spreads business from Dairy Crest in 2012 for £344m," Credit Suisse added.

Dairy Crest shares rose 4.0% to 538.5p in morning deals in London.


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