ANALYSIS – The recent takeover proposals by the Scandinavian group Arla Foods of Milk Link in the UK have potentially seismic repercussions for not only the UK milk industry but the European and even global dairy sectors, writes Chris Harris.
The Arla-Milk Link deal if it gets the go-ahead from the competition authorities will see the amalgamation of two significant dairy co-operatives. Milk Link has 1,600 British dairy farmer members.
It will create the largest player in the UK dairy market, which will process over three billion litres of milk per annum and have a combined turnover in excess of £2 billion.
The merged business will include the UK’s number one dairy processor which will have established market positions in fresh and long life liquid and flavoured milks, cream, Cheddar and speciality cheese, butter and dairy ingredients. It will have well invested state of the art processing facilities located across the UK complemented by a national milk supply.
The proposed merger builds on the strong and mutually beneficial working relationship that already exists between the two parties. This includes a joint venture in Westbury Dairies Ltd, shared facilities at Lockerbie and Milk Link supplying raw milk to Arla.
This merger builds on Arla’s plans to invest in and grow the UK dairy market and enter new categories. Arla Foods amba has invested over £500 million in the UK dairy industry, where it has established some of the country’s most popular dairy, brands including Cravendale, Lurpak and Anchor.
The merger, which will go to the Milk Link members on 26 June, will give the company a turnover of more than £2 billion.
Processing approximately two billion litres of milk a year, Arla is one of the UK’s leading dairy companies and a supplier of fresh liquid milk, cream and dairy products to the major retailers.
However, this merger puts the new co-operative head to head with the other leading European dairy business, Mí¼ller, which at the start of the year bought out another UK dairy business, Robert Wiseman Dairies.
Wiseman, which floated on the London stock market in 1994, provides a third of Britain’s fresh milk from six dairies and 14 depots around the country – processing 1.5 billion litres a year.
Its customers include Tesco, Sainsbury’s and the Co-operative Group, as well as 12,000 convenience stores – it is the biggest supplier of milk to corner shops.
The move for Wiseman by Mí¼ller gives the company a large-scale liquid milk business to complement its dairy products.
Mí¼ller was known to have shown interest in the UK’s third dairy company – Dairy Crest – having a three per cent ownership at the time of the Wiseman takeover. However, now that the Wiseman deal has gone through interest in Dairy Crest has waned.
With the Arla-Milk Link deal also on the cards, the situation is looking uneasy for Dairy Crest. Dairy Crest also has a rather shaky financial basis at present. This year the company reported a two per cent rise in turnover, which in current economic times could seem healthy.
However, the company’s profits slipped slightly, with pre-tax profit before exceptionals down by £200,000 (£87.4 million compared to £87.6 million in the previous year).
However, adding in the exceptional overheads, the company made a loss of £10.1 million and reported a loss per share.
With the potential power of Arla and Mí¼ller competing in the market, Dairy Crest could be vulnerable in the UK. It might have to rely on other areas of its business – its foods’ business and spreads’ business in France – to support its dairy interests.
If the two European giants do create enough pressure on Dairy Crest, it could see the UK dairy sector left in the hands of these two companies. As the pig meat industry in the UK has fallen largely into the hands of the major European cooperatives of Danish Crown and Vion, so too could the dairy sector.
After the Milk Link members take their decision on 25 June, the industry will await the views of the competition authorities, but if Dairy Crest does succumb to the market pressure put on by the big two, the UK will be left without a British-owned dairy processor and distributor of significance.
Chris Harris, Editor-in-Chief