The £40m deal, struck more than a year ago but delayed by competition concerns, marks the end of an era for a company that grew out of the Milk Marketing Board — the government agency set up in 1933 to guarantee minimum prices for dairy farmers.
With the disposal, Dairy Crest has shrunk its business from £1.3bn of sales last year to £450m, according to analyst forecasts.
“There aren’t many companies that sell two-thirds of their turnover,” says Mark Allen, Dairy Crest chief executive, in an interview with the Financial Times. Getting out of milk was “absolutely necessary,” he adds, noting the £143m of dairy losses racked up over the past four years that contributed to the headline price for the sale dropping from £80m originally.
Now milk-free, Mr Allen is placing a big bet — a £75m investment — on developing the group’s small ingredients business into products aimed primarily at the global infant formula market.
These are whey and the hard-to-pronounce galacto-oligosaccharide (GOS). Dairy Crest already sells whey — a byproduct in the cheesemaking process — but is switching production to demineralised whey, while GOS, a lactose-derived product, is a new venture.
Sitting in his spartan office at the company’s glass-fronted headquarters in Esher, Surrey, Mr Allen, who became chief executive in January 2007, expresses relief that the dairy sale is finally over after the uncertainties of a “gruelling” year-long competition inquiry.
“We’ve been looking at a solution for our dairies business since I’ve been CEO — so nearly nine years,” he says. “Farmers are having a tough time [as] milk prices are very low. Creating a more sustainable business has to benefit farmers in the medium and the long term.”
Plunging milk prices due to an oversupply have been a “nightmare” this year for UK dairy farmers, according to the National Farmers Union.
The UK’s three biggest producers all reported losses in their most recent annual accounts — £16m at Dairy Crest; £83m at Arla Foods, the UK arm of the Danish co-operative and £98m at Müller UK and Ireland.
Mr Allen believes milk production is better off in the hands of co-operatives or privately owned companies, such as the Müller Group, instead of “a publicly quoted company that has to produce results every six months.”
Three big companies are a crowd in a sector that makes little or no profit, according to Ronald Kers, Müller group chief executive, who said: “There is no question that further consolidation is required in the UK fresh milk sector.”
Both the UK government and the NFU welcomed the disposal, as have Dairy Crest investors. The shares have risen by 55 per cent since it was announced in November 2014, giving the group a market value of £900m.
The slimmed-down Dairy Crest is now left with three businesses: cheese, dominated by its successful Cathedral City brand; the low-growth butter and spreads unit that includes Country Life, Clover and Frylight low-calorie cooking oil; and its nascent ingredients unit.
Mr Allen’s growth ambitions are focused on manufacturing ingredients for the infant formula market, though it remains to be seen whether he can emulate the kind of growth that Cathedral City has enjoyed.
Cathedral City is bought by more than half the country’s households and is the 16th biggest-selling grocery product. Last year’s sales of £285m were 24 times higher than in 1996, soon after Dairy Crest bought the brand.
About 70 per cent of that growth has come from innovations, says Mr Allen. These include new formulations and packaging, such as snack packs, lighter cheese versions and, this Christmas, the first three-year cheddar, for Tesco.
Mr Allen says that “the vast amount of our profits” will continue to come from its branded products. “What demineralised whey and GOS give us, is growth to those profits. And that’s the exciting bit.”
The group is close to completing its two-year investment in its Davidstow plant in Cornwall.
About £45m has gone into the capability to produce demineralised whey, which it will sell to New Zealand’s Fonterra, the world’s biggest milk supplier, under a five-year contract.
The rest has been spent on a new process to manufacture GOS, a prebiotic derived from lactose which supports good bacteria in the gut, and to which a proprietary enzyme is added. Used for infant formula, GOS can be developed into a nutritional product for adults and animals.
This too will be sold to Fonterra. Mr Allen says he is not worried about the threat of over-dependence on Fonterra, saying the group has provided Dairy Crest with technical know-how and access to customers. “They give us a global reach that we wouldn’t be able to do as Dairy Crest,” he says.
He expects the payback from the demineralised whey investment to take five years, and for GOS seven or eight years. He disagrees that this is a long time, arguing that: “GOS is a brand new business and that would be the sort of payback period you might have for an acquisition.”
Last week, Dairy Crest paid £6m to Fayrefield Foods to take full control of their joint venture company developing GOS. Mr Allen says further bolt-on acquisitions are possible, including for the cheese unit.
Some analysts believe that, freed of the burden of milk, Dairy Crest could itself become a bid target. Charles Pick, analyst at Numis, says the “slimmer Dairy Crest will be a far more attractive proposition for investors and it remains feasible that the group could attract bid interest.”
For now, Mr Allen, who has no plans to move on, is content. “We’re a business that can talk about growth; that is something that I’ve not been able to do over the last nine or so years.”
Source: FT