Japanese brewer Kirin Holdings is expanding its food business in Australia through unit National Foods' $780 million acquisition of Dairy Farmers, helping it diversify away from a shrinking domestic beer market as Japan's population ages.
Analysts said the move by Kirin, which bought National Foods for $1 billion in November, begins a long-awaited rationalisation of Australia's A$3.2 billion dairy industry, which is largely state based and comprises farmer co-operatives as well as New Zealand co-operative Fonterra and Italy's Parmalat. "It's pretty pricey, but at the end of the day few would disagree it now gives National Foods more scale (in Australia)," said Deutsche Bank analyst Kristan Walker.
"The Australian assets including Lion Nathan have been one of the major earnings drivers for Kirin, so it looks as though Australia is becoming a more meaningful place of investment for them."
Kirin owns 46 percent of Australasian brewer Lion Nathan Ltd. The Japanese firm said last month it would spend about 300 billion yen ($2.7 billion) on acquisitions and alliances until 2012, after spending over 400 billion yen in the last 18 months. National Foods owns the Pura Milk and Berri juice brands, while Dairy Farmers makes Dairy Farmers brand milk, Coon cheese and Ski yoghurt.
Dairy Farmers, which has a small export business to Southeast Asia and is Australia's top milk manufacturer and second-ranked cheese maker, said its board would unanimously recommend the A$910 million offer to its 2,000 farmer shareholders, subject to an independent expert's report. National Foods will pay A$5.65 per share in cash, which it said implied a multiple of 12.8 times fiscal 2008 earnings before interest, tax, depreciation and amortisation. "National Foods has the capability and financial strength to leverage the (Dairy Farmers) acquisition to create new business opportunities domestically and in the vitally important Asian region," Managing Director Ashley Waugh said in a statement.
Australian producers are benefiting from high milk prices and tight supplies. Dairy Farmers recently posted a 23 percent increase in earnings for fiscal 2008. But a strong Australian dollar has made exports more expensive and less competitive against New Zealand dairy products.
National Foods, which made the offer with venture partner Warrnambool Cheese and Butter Ltd, has already received competition clearance. National Foods beat other bidders including Australian farming co-operative Murray Goulburn and Canadian dairy firm Saputo. Fonterra, Parmalat and Singapore's Olam earlier quit the bidding.
Dairy Farmers Chief Executive Rob Gordon told reporters he expects the deal will lead to consolidation of the industry. "The industry will benefit from rationalisation, there are a number of overlaps between the two businesses," he told reporters.
The National Foods offer needs to win support of 75 percent of Dairy Farmers' shareholders, and also depends on the dairy producer agreeing on revised supply contracts.