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Bega Cheese snaps up Vegemite as part of $460m deal

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Shares in Bega Cheese surged on Thursday after it announced it would snap up Vegemite and other Kraft brands in a $460 million deal that takes it far from its roots as a cheese producer.

In a surprise move, the company said it would buy the Kraft-branded food products businesses in Australia, which gives it control of a suite of household names spanning Vegemite to peanut butter, mayonnaise and Kraft processed cheese.

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Back in 2011, former prime minister Julia Gillard was asked about Vegemite while visiting a US high school.

Bega said the acquisition will give it a strong presence in the domestic spreads business.

Investors cheered the news, marking Bega shares up a hefty 15 per cent to $5.16, recouping part of the losses recorded last October when concerns over slow sales of its infant milk formula joint venture with Blackmores saw the shares dumped.

Now Bega is adding a new string to its bow, extending its reach well beyond its roots in the dairy industry and directly into the $700 million market for bread and toast spreads.

The revenue of the businesses being purchased run at $310 million a year with the gross profit, as measured by earnings before interest, tax, depreciation and amortisation estimated at $40 million-$45 million in the first full year. The deal is a good one for Bega shareholders, it said, since it will boost earnings a share from the first full year of operation.

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Bega will borrow the money needed to complete the acquisition, but it has signalled other initiatives, such as unspecified "corporate activity" to help fund the deal. Nor has it ruled out a share issue.

"Today is a historic day for Bega Cheese," executive chairman Barry Irvin told analysts. "This is an exciting evolution for the company.

"This acquisition will be value accretive in its own right, strategically important and company making. These iconic brands alongside the Bega brand are strong building blocks to enable Bega Cheese to become a great consumer goods business.

"We are buying an iconic brand in Vegemite and some growth opportunities into the future."

Also included in the deal are brands such as Bonox and ZoOsh, along with nut spreads, salad dressings and other products such as parmesan cheese, but it does not include the Philadelphia cheese business.

Ownership of the Kraft brands transfers back to the US-controlled group at the end of the year, with transitional arrangements to be undertaken, Bega said. Mr Irwin said it it was important to try to hold onto the Kraft brand for peanut butter and cheese products, but it was unclear whether it would be possible.  

"We've got lots of options in that area," he said. "We expect and need to transition the brand and we expect Kraft will look to use its brands.We're really proud of the Bega brand, we'll obviously own Vegemite, we think there's so nice opportunities around how we might market and build I suppose what's two iconic Australian brands in Bega Cheese and Vegemite."

All staff at the Port Melbourne site it is buying from Kraft will be retained, including administration staff, at least initially, as Bega intends to operate the new business "as a separate platform", he said.

Bega's outgoing chief executive Aidan Coleman said the purchase was not a sign of it diverting from Bega's dairy heritage.

"At the heart and the core of the business we are a dairy company, unquestionably.

"We own the No.1  cheese brand in Australia, we're the biggest cream cheese producers in Australia, we're a big infant formula company, so dairy is at our heart and operationally and the way we look at both the domestic market and Asia is certainly through very much a dairy focus.

"Dairy assets are hard to come by in Australia  and we are a growth-focused company, but with spreads, whether it's Vegemite or peanut butter and cheese, there's a lot of commonality in the consumer base that actually purchases and consumes those products, so we see it as a development of the business rather than a transformation of the business."

Speaking with analysts, Bega did not rule out going to shareholders to raise funds to partially finance the acquisition, although it said it has other transactions it is negotiating which may limit the need for additional funding, without giving details.

Data from Euromonitor shows that sales of yeast-based spreads in 2016 declined to $135.1 million from $137.4 million the year before.

– with additional reporting by Patrick Hatch