Everyone knows Vegemite and cheese go well together, and Bega Cheese's $460 million acquisition of Australia's most iconic brand is the dairy company's first step towards transforming itself into a major consumer-goods brand.
Bega executive chairman Barry Irvin has another big deal in the pipeline, although it is not clear if that involves an acquisition (Bellamy's anyone?) or an asset sale (bye bye Blackmores joint venture?). Either way, he has acquired a powerful Australian brand at a reasonable multiple which allows the company to diversify away from cheese at the right time.
Investors warmed to the deal which caught short-sellers on the hop. Bega's stock has been out of favour since October because of its exposure to companies like infant milk formula group Bellamy's and vitamins producer Blackmores which have run into problems in China.
The deal to acquire Vegemite along with a stable of Kraft-branded products from US giant Mondelez International sent Bega's stock up 15.2 per cent. This was despite the fact the company is moving out of its safety zone of dairy and has flagged a potential capital raising if it cannot pay down debt another way, presumably from asset sales.
More than 5 per cent of Bega's stock was shorted. Bega's shares lost 40 per cent of their value between October 24 and December 20, after its partnership to sell infant formula and nutritional powder with vitamin maker Blackmores failed to meet sales forecasts. Since Christmas, Bega shares have picked up, but it was the Vegemite deal which gave them the biggest boost.
Politicians raced to applaud the return of the Australian icon to local ownership although the change of ownership is a positive largely for sentimental reasons as it will not trigger a sudden boost in jobs or investment.
Vegemite is the first Australian iconic consumer brand to be brought back by a local company in decades, after a wave of acquisitions by global multinationals which gobbled up the likes of Foster's, Arnott's, Uncle Toby's and Aeroplane Jelly.
The deal is good timing for Bega because it needs to diversify away from its core dairy operations, which have limited growth opportunities. Big multinationals are also looking to scale back local manufacturing operations and focus on global brands.
Bega has been talking to US-based Mondelez about buying Vegemite and other Kraft-branded products such as peanut butter, mayonnaise and macaroni and cheese for about a year. Bega has been a supplier of cheese to Mondelez for years. Mondelez acquired the brand in 2012 when former owner Kraft Foods split up its snack and grocery food operations.
Irvin said dairy would remain core and he is looking at other deals, but also hinted the company may sell assets to raise capital. The obvious move would be to exit its Blackmores partnership.
The deal comes at a price though. Bega will take on debt to fund the deal via an existing $500 million facility. The preference is to repay debt through cashflows, although the company has the option of a capital raising.
The deal will add around another $310 million in revenues to Bega's existing sales, which were $1.2 billion last financial year. Bega expects the business to generate EBITDA of $40 million to $45 million in its first full year of operations.
Despite Australia's enthusiasm for Vegemite, the product has limited growth potential. Vegemite is already a staple in most Australian households and there is limited appetite for the spread beyond Britain and to a small number of Australian expatriates living overseas. However, the trend towards healthier breakfast spreads as consumers shun sugar is encouraging.
The deal reinvigorates Bega's growth strategy after it lost in the bidding for Warrnambool Cheese and Butter in 2014, when it sold its 19 per cent stake in the target to Canada's Saputo.
Meanwhile, Bellamy's formal response to dissident shareholder Jan Cameron's efforts to roll the board was out on Thursday. Its letter to shareholders confirmed an earlier report in The Australian Financial Review that Cameron had offered the company financial support. Bellamy's says a proposed convertible note was for an initial amount of $5 million with potential for a further $15 million. Something else for the corporate watchdog to look into.
