World News – AU – Bega cooks Australian food champion

The diplomatic divide between Australia and China has allowed Bega Cheese, listed on the ASX, to start a large Australian food group with a string of well-known dairy and beverage brands such as Dairy Farmers, Pura and Farmers Union, which now stands alongside the famous Vegemite brand that it bought in 2017.

Bega Cheese has acquired Lion’s dairy and beverages business for $ 560 million to add milk, juice and yogurt brands, which include Big M and Yoplait, to its stall.

Paul van Heerwaarden, CEO of Bega, left, and Barry Irvin, chairman, say the deal is a huge step forward for the company. Morgan Hancock

But it was only the geopolitical spit between China and Australia that provided the opportunity after the federal government blocked the sale of the Lion division to China Mengniu Dairy for $ 600 million in August after months of delays because Treasurer Josh Frydenberg said this  » against the national interest  ».

The proposed transaction, which was signed between Lion and China Mengniu in November 2019, fell victim to the increasingly strained diplomatic relations between China and Australia and public fear of Chinese acquisitions in Australia. This tension has increased in recent months as coal, barley, lobster and wine producers in Australia were hit by trade blockades, import congestion in ports or the direct threat of tariffs.

Bega Cheese CEO Barry Irvin said the timing was by coincidence for the company, which had undergone its own cost-cutting program last year and is ready to expand again.

« The timing for the asset to come back into play was ideal for us, » said Irvin.

The acquisition will more than double Bega Cheese’s total sales to approximately $ 3 billion, but Mr Irvin said the juice portion of the business could be dumped for not being core business and fighting for good returns.

But the overall acquisition was a critical building block in making Bega a truly great Australian food company, with the Lion operations grossing $ 1. 6 billion in sales and 56 million dollars in profit.

« It really is a company-defining acquisition, » said Irvin. The total price of $ 560 million includes IT disconnection costs of $ 26 million, bringing the net price down to $ 534 million. A capital raise of $ 401 million at a cost of $ 4. 60 will pay for a large part of the transaction. Bega Cheese has been on a trading freeze since Monday.

Lion, who also runs a large beer business with brands like XXXX Gold, Tooheys, and West End, is owned by Japanese giant Kirin.

Lion’s Dairy and Beverage division also includes Australia’s only national cold chain distribution network, delivering the products to retail outlets and other outlets. Lion’s milk and beverage business has 13 production sites, almost twice the size of Bega’s seven production sites.

The purchase also gives Bega Cheese a big step forward in moving away from non-branded supermarket house brand products and becoming more of a branded product provider. Profit margins are better on branded products as supermarket giants Woolworths and Coles are less likely to push for a larger chunk of profit for brands like Lion’s Milk & Beverage offerings, the No.. 1 or no. 2 in their categories.

The company’s goal of generating 70 percent of sales with branded products by 2023 has been pushed forward by three years. It was 20 percent in 2017 and is now 59 percent.

Bega Cheese stepped into Lion’s « Black Box » data room last weekend in the final phase of the sales process, ousting Canadian dairy giant Saputo and a consortium led by Tanarra Capital to access the internal operations of Lion dairy products and beverages receive.

Mr. Irvin said the company will act quickly to generate $ 41 million in synergy. USD once the deal closes in January.

The portion of the white milk business that was a “foundation” of the cold chain network that Bega would inherit would be a strong focus for synergies and streamlining, he said.

The juice operations were not a burning platform, but required a lot of work. « I wouldn’t call the juice the core, » said Irvin, signaling that asset sales were likely.

He said Bega Cheese has always had great ambitions to build a large Australian food company. « Timing can be important in these things, » he said.

The deal increases the company’s milk intake to 1. 7 billion liters per year, out of 955 million liters, it is the second largest milk processor in Australia after Saputo.

Bega Cheese diversified in 2017 with the purchase of the famous Vegemite brand and a handful of other food products for $ 460 million from global food giant Mondelez International.

The $ 401 million raise in capital includes a one-on-four $ 220 million raise. 5 proportionately accelerated, non-cancellable entitlement offer and an institutional placement of 181 million. USD.

The fully signed deal is $ 4. 60 a stock that represents a 9. 1 percent discount on Bega’s last degree.

Stuart Irvine, Lion CEO, said the sale would result in the business being transferred to a seasoned player. He said the price was $ 560 million gross.

« With the sale, Bega, an established dairy and food company with more than 120 years of tradition, will be able to drive the business forward as it has extensive dairy expertise and is deeply committed to cult Australian brands and the local dairy industry.  » Mr Irvine said.

Evans and Partners analyst Phil Kimber said the net purchase price of $ 534 million was equivalent to a gross selling price of $ 560 million, minus a $ 26 million after-tax deduction for IT separation costs. Mr Kimber said the flavored milk and yogurt stores are the jewels in the crown of Lion dairy products and beverages, with juice being a « tough category ». .

Paul van Heerwaarden, CEO of Bega Cheese, said the group did not underestimate the challenges, but the company is in a prime position after going through its own cost improvement program.

The integration would be a complex task. « It has a lot of moving parts, » he said.

The company also announced a trade update on Thursday, saying that the infant formula business had been weak, largely due to the absence of Daigou dealers in the Australian market. Travel bans and restrictions for international students had been a big handbrake compared to normal times when thousands of Daigou were selling Australian products on e-commerce websites.

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Bega Cheese, Lion Dairy & Drinks, Kirin Holdings Company, Lion, Dairy Farmers Pty Ltd, Australia