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Dairy Crest’s hints at ‘au revoir’ to French spreads as acquisition strategy stalls

By Ben Bouckley , 09-Mar-2012

Dairy Crest surprised analysts today by announcing a strategic review of its French branded spreads business, St Hubert, with a possible divestment on the cards, and said that large dairy concerns based in the country didn't 'seemed keen' to let foreign companies complete acquisitions there.

The company said in a stock exchange announcement that it had been “unable to make additional synergistic acquisitions in Continental Europe as it envisaged at the time of its acquisition of St Hubert”, from Uniq for €370m in November 2006.

External affairs director, Arthur Reeves, told DairyReporter.com: "Since we bought St Hubert the stock exchange attitude to debt has changed, so our shareholders haven't wanted us to borrow as much money, which reduces our firepower, and also when firms have come up for sale, they tend to be bid for by the big French dairy companies. The big French dairy companies haven't seemed keen to let foreigners in.

"For a business in our position - a mid-cap food company - you have to get synergies, if you're going to make acquisitions. That's what we thought we'd be able to do in Europe and we haven't been able to do that."

Dairy Crest said that greater value for shareholders might be generated by considering options for the business, and Damien McNeela, research analyst at stockbrokerage Panmure Gordon, predicted a valuation range for the business of £410-416m (based on 3.9x sales and 13x EBITA).

The company said that a disposal would reduce group debt and provide it with a number of alternatives,“including releasing some proceeds to shareholders, investing in its core business, and making strategic acquisitions of branded businesses in the UK”.

“This would further improve Dairy Crest’s strong position in the consolidating UK dairy market. Any acquisitions would be synergistic and made within strict financial criteria, as will any decision over the future of St Hubert,” the firm added.

Analysts surprised

But McNeela said today that he was surprised by the news, and estimated that St Hubert would generate £105m of revenues and contribute to around £32m of group EBITA in 2012 overall.

He said: “The French Spreads business represents circa. 30% of group EBITA and is the highest margin part of the business. The decision therefore to seek to dispose of the business at a time when the UK Dairies business is under so much pressure comes as a surprise.”

Asked about McNeela's comments, and whether - if Dairy Crest sold St Hubert - the rationale was to (1) pay down group debt, and (2) target smaller bolt-on UK acquisitions, Reeves said: "Not necessarily smaller, but they would be synergistic to refocus back on the UK. Damien is right, and other commentators are right that our dairies business is under pressure, but it's a business that we want to be in, and we can see ways of making that business profitable, and we're working on those."

McNeela added that Panmure Gordon understood that a “number of players” had previously expressed an interest in the business, and predicted a possible sale within three to six months.

He said: “Providing a buyer is found, which is likely in our view, Dairy Crest hopes to use the proceeds to make further potential acquisitions in the UK branded/chilled category.

“Our concerns are over whether any UK branded acquisition will be dilutive or not, but highlight that we estimate cheese EBITA margins to be half that of French spreads at circa. 15%.”

Transform balance sheet

Nicola Mallard, from Investec Securities said that any divestment of St Hubert would "transform Dairy Crest's balance sheet" (she forecast net debt for the group of £356m for March 12) and give it flexibility to invest in the core UK business. 

"However, until we know how any proceeds may be reinvested we have to assume any such sale is likely to be dilutive to the quantity (and possible quality) of earnings," she added.

Predicting a sale price "comfortably in excess of £300m" for French spreads, Mallard said there was little private label penetration within that market, with "the key Omega brand gaining share in France as certain of its competitors were temporarily delisted".

Whatever the outcome of the review, Dairy Crest said it planned to continue to develop of its broadly based UK business, including the brands Cathedral City, Country Life, Clover and Frijj.

The firm is due to issue its full-year trading update on March 29 2012, and preliminary results for the year ending March 31 on May 24.

McNeela said that Panmure Gordon maintained its ‘hold’ recommendation on Dairy Crest’s stock, “until we have a clearer picture of how Dairy Crest’s UK portfolio of brands will look going forwards”.

“Current trading is doubtless difficult for UK Dairies with lower cream and higher diesel and HDPE costs since the start of the year,” McNeela said, but added that Dairy Crest had maintained its full-year guidance.

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