Bega Cheese has made a bold strategic shift with a $460 million deal taking the dairy processor into branded consumer goods after snapping up names such as Vegemite and KRAFT Mac & Cheese from Mondelēz International's Australia and New Zealand business.
The surprise deal pushed Bega's shares up more than 15 per cent, or 68c to $5.16 on Thursday – their highest close in nearly three months.
Executive chairman Barry Irvin looked to reassure dairy farmers Bega was committed to the industry, despite revealing to The Australian Financial Review its baby formula joint venture with vitamin maker Blackmores is under review after sales last year fell short of expectations in China.
Dairy still core to operations
"Our perspective is at our core is dairy and it will remain the case and we still believe there are great opportunities in dairy in terms of aquisitions in dairy but it's limited," Mr Irvin said.
"We continue to be interested in those acquisitions, but they have to be high quality. There is a great deal of parallel activity as to what Mondelēz does and what we do. We will continue to develop both areas. We think this adds further stability to Bega."
The Mondelēz division also includes brands like ZoOSh salad dressing and sauces, and Bonox spreads, as well as the 6.3 hectare Port of Melbourne manufacturing site. Bega will also get a licence to the Dairylea brand in Australia and New Zealand.
Mr Irvin said marrying Vegemite and cheese were the building blocks for a great fast-moving consumer good [FMCG] business.
The Mondelēz grocery business has 31 per cent share of the $550 million spreads category in Australia, which Bega is hoping to grow.
Vegemite is the home-grown hero, with a 90-year history. The salty spread, which was born in Melbourne before being consumed by US giant Kraft Foods, is found in nine out of 10 homes in Australia.
However, Data from Euromonitor shows that sales of yeast-based spreads declined slightly in 2016 to $135.1 million. Mr Irvin said changing breakfast habits had affected sales but he hoped to capture younger consumers following a fresh ad campaign.
"We do recognise this is a mature business with strong loyalty, love affection for the brand. It is a brand that creates a platform to improve its market position but do other things as well," he said.
Mr Irvin said nut spreads like peanut butter were growing strongly on the back of health and wellness, while the ZoOSh brand was already the No. 2 salad dressing after launching just four years ago.
Bega will hold a licence to sell some KRAFT-branded products (such as peanut butter and other spreads) until the end of this year at which point it will consider a range of options, such as handing the licence back to the US-listed snacks company or signing a new contract.
The Mondelēz division is tipped to generate pro-forma net revenue of about $310 million and earnings before interest, tax, depreciation and amortisation of between $40 million and $45 million in its first full year of operation, excluding transaction and implementation costs.
The deal will be funded from Bega's existing $500 million facility with RaboBank and Westpac. Mr Irvin looked to quell balance sheet concerns stating a future capital raising may be necessary, but the company is "well advanced" in another opportunity that would help repay debt quickly.
Deal offers diversification
Select Equities analyst Mark Topy said Bega were good brand managers and the deal gave them diversification. "Vegemite under control of Australians will likely grow," he said. "This now takes them to supermarket levels, and they understand this space."
Mr Topy said if Bega aims to get the net debt to EBITDA ratio back to around 2.5 times the company needed to pursue asset sales, JVs, sale and lease back, and / or a capital raise of about $200 million.
"They would have no problem getting an equity issue away if that's what is needed. All the infant formula stuff is likely to blow over in six months as well," he said.
Bega has been under pressure following revelations last year that it fell short of baby formula sales in its JV with Blackmores in China. It has also been tangled up with troubled organic formula maker Bellamy's Australia, to which it supplies product via its Tatura plant.
Mr Irvin said on Thursday he remained committed to working with Bellamy's as he had done for the past decade but that the JV was under review.
"Christine (Holgate) and I have been open in saying it is news to nobody that the nutritional sector has changed significantly since we began that joint venture. We are keeping the opportunities, structure and where we think that JV will go under review," he said.
