Investec welcomed the deal as good news, since dairies had always been the “poor relative” in the business, diluting margins and the quality of earnings. Its analyst Nicola Mallard said: “It will dilute the quantity of profit, but improve the quality so we do not expect any negative share price reaction.”
But approval by the competition authorities could not be taken for granted, as the acquisition cut the number of big players from three to two, she added.
The deal includes the sale of Dairy Crest’s supermarket/middle ground and doorstep business, as well as the Frijj flavoured milk brand. Mallard noted the doorstep business had proved a significant provider of property profits, which will be curtailed by the sale.
But the firm had retained between 20–30 depots which, while already closed, will provide some property income for another few years, said Mallard. The total value of that income was estimated at £20M. The firm had retained full ownership of the closed dairies at Totnes and Fenstanton, the Chard site and also a number sites.
“Given that our forecast for financial year 2016 for dairy was £16M, this deal will dilute, even assuming some smaller ongoing property contribution,” said Mallard. “However, the market was ascribing a low value to dairy profits (our analysis would suggest slightly less than the £80M agreed), so we see this deal as value enhancing despite the expected dilution.”
Significant tax benef
Shore Capital said the deal will result in significant tax benefits for the group. “We expect Dairy Crest to benefit from about £15m of tax benefits from the deal, taking the total value [of the deal] to about £115M” said analysts Darren Shirley and Clive Black. “We see this as an excellent deal for Dairy Crest and believe credit should go to ceo Mark Allen and his team in engineering this event.”
The sale was not expected to impact the profitability of the firm’s retained operations, which delivered £56.1M of operating profit in financial year 2014.
The analysts repeated their ‘buy’ advice on Dairy Crest stock.
The maker of Cathedral City cheese and Country Life butter processes and delivers about 1.3bn litres of milk a year to retailers and homes.
After the deal was announced yesterday November 6) Dairy Crest shares rose about 10% in value in morning trading.
Read more about the deal here.