Prices for dairy ingredients like milk and butter have fallen sharply for more than two years, hit by a global oversupply, squeezing the finances of farmers and producers and pushing many towards consolidation in search of economies of scale.
By contrast, at the other end of the sector, the low ingredient costs are plumping the profit margins of companies that make «value-added» products like yoghurt, cream cheese and infant formula, making them attractive targets for food multinationals and private equity investors.
There is speculation about potential deals in the United States, for example, involving the likes of WhiteWave Foods, which sells premium dairy products and alternatives like soy milk, and Greek-yoghurt maker Chobani, which has rejected suitors including PepsiCo.
But M&A activity is increasingly focusing on emerging markets in Asia, the Middle East and eastern Europe, where expanding middle classes are boosting demand for expensive dairy products and offering the best growth prospects.
The dairy industry is «one of the more attractive growth markets from a long-term perspective, in terms of per capita consumption», said Wells Fargo analyst John Baumgartner.
While there have been 876 deals in the global dairy industry since 2010, worth a total of $US57.3 billion ($A76.68 billion), according to Thomson Reuters data, the sector is still highly fragmented – leaving room for further consolidation.
The top five players – France’s Danone and Lactalis, Switzerland’s Nestle, and China’s Mengniu Dairy and Inner Mongolia Yili Industrial Group – account for just 18 per cent of the retail market for all dairy products, which was worth $US446 billion in 2015, according to Euromonitor International.
The deals in the sector have included some blockbusters like Nestle’s $US12 billion purchase of Pfizer’s infant nutrition business and Lactalis’s move to control Italian rival Parmalat. But most have been smaller bolt-on buys.
On global commodity markets, dairy prices have fallen by about half since 2013 and a quarter in the past year alone, according to the UN food agency’s Dairy Price Index, which factors in ingredients such as milk, butter and cheese.
This has helped drive consolidation among producers: Mexico’s Grupo Lala agreed to buy certain US assets from Laguna Dairy in May, for example, while Italy’s Parmalat bought 11 dairy plants from BRF in Brazil in 2014.
New Zealand’s a2 Milk in 2015 rejected a joint takeover offer from Freedom Foods and Dean Foods, but remains a possible target, analysts say.
«There’s been severe pressure on the milk price … there is always a huge drive for efficiencies and part of that is through consolidation and taking out additional costs where possible,» said Trefor Griffith, a food and beverage sector specialist at financial consultancy Grant Thornton.
The price squeeze has also prompted some major producers with deeper pockets, such as Australia’s Murray Goulburn and Ireland’s Glanbia, to diversify into products like nutritional yoghurts and dairy sports drinks.
It is manufacturers of these kind of higher-margin dairy products, which also include baby formula and cream cheese, which are increasingly becoming deal targets, particularly in emerging markets.
Reuters in May revealed that private equity firm KKR was bidding against Saudi dairy giant Almarai for a majority stake in Abu Dhabi-based National Food Products, one of the biggest food and dairy product manufacturers in the United Arab Emirates.
Denmark’s Arla Foods agreed a joint venture with Egyptian UHT-milk and yoghurt maker Juhayna in 2015 which gave it access to the market there. It told Reuters it had turned its M&A focus to markets outside the EU to regions including the Middle East, China and Africa.
New Zealand-based multinational dairy company Fonterra has also formed a joint venture with China’s Beingmate to supply baby formula to Chinese consumers.
Meanwhile, Chinese companies looking to tap their growing domestic market and also expand overseas have looked to strike deals in New Zealand and Australia – two of the world’s biggest dairy exporters – for both supply purposes and know-how.
Inner Mongolia Fuyuan Farming, one of China’s biggest dairy farmers, in May agreed to buy a 79 per cent stake in Australia’s Burra Foods for $A300 million.
«At the core of takeover interest is the ambition to use Australia to get into Asia,» said Melbourne-based Rabobank dairy analyst Michael Harvey.
By contrast, at the other end of the sector, the low ingredient costs are plumping the profit margins of companies that make «value-added» products like yoghurt, cream cheese and infant formula, making them attractive targets for food multinationals and private equity investors.
There is speculation about potential deals in the United States, for example, involving the likes of WhiteWave Foods, which sells premium dairy products and alternatives like soy milk, and Greek-yoghurt maker Chobani, which has rejected suitors including PepsiCo.
But M&A activity is increasingly focusing on emerging markets in Asia, the Middle East and eastern Europe, where expanding middle classes are boosting demand for expensive dairy products and offering the best growth prospects.
The dairy industry is «one of the more attractive growth markets from a long-term perspective, in terms of per capita consumption», said Wells Fargo analyst John Baumgartner.
While there have been 876 deals in the global dairy industry since 2010, worth a total of $US57.3 billion ($A76.68 billion), according to Thomson Reuters data, the sector is still highly fragmented – leaving room for further consolidation.
The top five players – France’s Danone and Lactalis, Switzerland’s Nestle, and China’s Mengniu Dairy and Inner Mongolia Yili Industrial Group – account for just 18 per cent of the retail market for all dairy products, which was worth $US446 billion in 2015, according to Euromonitor International.
The deals in the sector have included some blockbusters like Nestle’s $US12 billion purchase of Pfizer’s infant nutrition business and Lactalis’s move to control Italian rival Parmalat. But most have been smaller bolt-on buys.
On global commodity markets, dairy prices have fallen by about half since 2013 and a quarter in the past year alone, according to the UN food agency’s Dairy Price Index, which factors in ingredients such as milk, butter and cheese.
This has helped drive consolidation among producers: Mexico’s Grupo Lala agreed to buy certain US assets from Laguna Dairy in May, for example, while Italy’s Parmalat bought 11 dairy plants from BRF in Brazil in 2014.
New Zealand’s a2 Milk in 2015 rejected a joint takeover offer from Freedom Foods and Dean Foods, but remains a possible target, analysts say.
«There’s been severe pressure on the milk price … there is always a huge drive for efficiencies and part of that is through consolidation and taking out additional costs where possible,» said Trefor Griffith, a food and beverage sector specialist at financial consultancy Grant Thornton.
The price squeeze has also prompted some major producers with deeper pockets, such as Australia’s Murray Goulburn and Ireland’s Glanbia, to diversify into products like nutritional yoghurts and dairy sports drinks.
It is manufacturers of these kind of higher-margin dairy products, which also include baby formula and cream cheese, which are increasingly becoming deal targets, particularly in emerging markets.
Reuters in May revealed that private equity firm KKR was bidding against Saudi dairy giant Almarai for a majority stake in Abu Dhabi-based National Food Products, one of the biggest food and dairy product manufacturers in the United Arab Emirates.
Denmark’s Arla Foods agreed a joint venture with Egyptian UHT-milk and yoghurt maker Juhayna in 2015 which gave it access to the market there. It told Reuters it had turned its M&A focus to markets outside the EU to regions including the Middle East, China and Africa.
New Zealand-based multinational dairy company Fonterra has also formed a joint venture with China’s Beingmate to supply baby formula to Chinese consumers.
Meanwhile, Chinese companies looking to tap their growing domestic market and also expand overseas have looked to strike deals in New Zealand and Australia – two of the world’s biggest dairy exporters – for both supply purposes and know-how.
Inner Mongolia Fuyuan Farming, one of China’s biggest dairy farmers, in May agreed to buy a 79 per cent stake in Australia’s Burra Foods for $A300 million.
«At the core of takeover interest is the ambition to use Australia to get into Asia,» said Melbourne-based Rabobank dairy analyst Michael Harvey.
Originally published as Dairy industry reshaped by Asian deals
