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Lactalis Seen Winning Cash Windfall in Milk Takeover: Real M&A

Lactalis Seen Winning Cash Windfall in Milk Takeover
Groupe Lactaliss dairy production plant stands in Laval, western France. Photographer: Damien Meyer/AFP/Getty Images

Silvio Berlusconi has opened the door for France’s biggest cheesemaker to snap up Italy’s largest dairy company at the cheapest valuation for a milk takeover.

Groupe Lactalis’s unsolicited bid this week to buy the 71 percent of Parmalat SpA it doesn’t own valued the Collecchio, Italy-based company at 16 times net income, the lowest for an acquisition in the industry over $500 million, according to data compiled by Bloomberg. The 3.38 billion-euro ($5 billion) takeover of Parmalat, which has the most cash of any dairy company in the world, would also be second cheapest to earnings before interest, taxes, depreciation and amortization.

A month after Italy’s government sought to block Lactalis from gaining management control of Parmalat, Prime Minister Berlusconi now says he doesn’t consider the Laval, France-based company’s bid hostile and pledged with French President Nicolas Sarkozy to create French-Italian companies capable of competing globally. While the deal would create one of the world’s largest dairies and end a half-century of Italian ownership, investors of Parmalat would recoup some of their losses since it emerged from Italy’s biggest bankruptcy as a public company in 2005.

“It looks like a deal was agreed between Sarkozy and Berlusconi,” said Kevin Shacknofsky, who helps manage $7 billion in Purchase, New York, for Alpine Mutual Funds. “The French are benefiting because they are getting an underperforming asset at a reasonable price that they can optimize with their added scale. Parmalat is a fallen angel.”

Dairy Acquisitions

Officials from Lactalis, which makes Sorrento ricotta cheese and President Camembert cheese, and Parmalat, maker of the namesake milk and Santal fruit drinks, declined to comment.

Three telephone calls to Italy’s government spokesman went unanswered.

Lactalis, the privately held company that boosted its stake in Parmalat to 29 percent last month, on April 26 offered 2.60 euros a share for the rest of the company. The deal, which Lactalis said will create the world’s biggest dairy company, values Parmalat at 16 times its 282 million euros in net income last year, data compiled by Bloomberg show.

No other dairy acquisition of more than $500 million was struck at an equity value less than 20 times net income, the data show.

“It’s a good deal for Lactalis and that’s probably the best Parmalat can hope for,” said Rob Plaza, an analyst at the private-banking unit of KeyCorp in Cleveland, which oversees $22 billion. “The Parmalat operations combined with Lactalis’s business are a much more stable foundation and they will be able to compete better.”

Acquisition Cost

Lactalis’s total acquisition cost is even lower because Parmalat has 1.44 billion euros more in cash and short-term investments than it owes in debt. Including its net cash, the takeover is valued at 1.77 billion euros, or 8.2 times its 377 million euros in Ebitda last year, Bloomberg data show.

That’s less than every dairy deal except for confectionery maker Meiji Seika Kaisha Ltd.’s acquisition of Meiji Dairies Corp., Japan’s biggest dairy company, which was struck at about 8 times Ebitda in September 2008.

Parmalat Chief Executive Officer Enrico Bondi built up the company’s cash hoard by winning settlements from former creditors after its bankruptcy in December 2003. The company collapsed amid allegations former managers hid billions of euros in losses and debt. Bondi, 76, sued Parmalat’s former lenders, saying their financing helped sustain the fraud.

While Bondi accumulated a larger cash pile than any other dairy company, its shareholders haven’t been rewarded with bigger advances. Since returning to stock-market trading in October 2005, Parmalat’s equity value has declined 16 percent, even after rallying 24 percent in the past year.

Stock Gains

The median gain for publicly traded dairy companies was 64 percent in the same period, data compiled by Bloomberg show.

“It’s a good deal for both,” said Chad Morganlander, a Florham Park, New Jersey-based money manager at Stifel Nicolaus & Co., which oversees $110 billion in client assets. “Valuation is appealing to a long-term strategic investor. Political posturing should not prevent Lactalis from being a majority shareholder.”

Bondi came under fire as Toronto-based Mackenzie Financial Corp., Skagen AS in Stavanger, Norway, and Zenit Asset Management AB of Stockholm called for Parmalat to boost shareholder returns. Lactalis last month bought the 15.3 percent stake that the three firms held in Parmalat for 2.80 euros a share, making Lactalis the biggest shareholder. The purchase price was 7.7 percent higher than its offer to current owners.

Berlusconi Government

After Lactalis’s purchase last month the Berlusconi government adopted a series of measures to block the French company from transforming its stake into management control of Parmalat. Italy authorized its state-owned lender to buy shares in companies identified as strategic and also allowed Parmalat to reschedule a vote on Lactalis’s management slate to give Italian investors more time to mount a defense. The measures were announced less than a month after LVMH Moet Hennessy Louis Vuitton SA of Paris agreed to buy Rome-based Bulgari SpA.

Following the annual French-Italian summit on April 26, Berlusconi and Sarkozy said they both support the creation of “big French-Italian” groups, with the Italian premier saying he aims for Italian investors to remain in Parmalat. Sarkozy said he couldn’t speak on behalf of Lactalis.

‘Global Competition’

“I welcome the creation of big French-Italian and Italian-French groups that can hold together in the face of global competition,” Berlusconi said at a press conference in Rome after the talks with Sarkozy.

Cassa Depositi e Prestiti SpA, Italy’s state lender, Intesa Sanpaolo SpA and Mediobanca SpA were working together to find an alternative solution for Parmalat, Intesa General Manager Gaetano Micciche said earlier this month. UniCredit SpA was advising on the plan.

Now, the plan is for Cassa Depositi to purchase a stake, said a person familiar with the discussions, who declined to be identified because the talks were private. A spokeswoman for Cassa Depositi declined to comment, as did officials for Mediobanca and Intesa Sanpaolo.

Deal Rationale

The Lactalis offer “will allow the emergence of a world leader in milk and cheese with a strong position in Italy” without forcing minority investors into accepting Italian ownership at a lower price, said Sophie Cabo-Broseta, an analyst who covers Parmalat at AlphaValue in Paris.

The offer from Lactalis is conditional on gaining 55 percent of Parmalat’s shares, Lactalis said in a letter to the regulator. The company is seeking to buy all of Parmalat after losing out on French yogurt maker Yoplait last month. Minneapolis-based General Mills Inc. entered exclusive talks to buy half of Yoplait from PAI Partners for 810 million euros.

The deal for Parmalat is the latest in a wave of dairy takeovers that have totaled $11.4 billion in the past year as food companies try to boost sales and take advantage of increasing demand in China and other emerging economies.

Buying Parmalat will help Lactalis, which is controlled by the Besnier family, expand in Brazil, India and China, where the companies currently have a “limited presence,” Lactalis said in a statement on April 26.

Dairy Sales

Dairy sales are forecast to increase 13 percent from 2010 through 2015, more than the 10 percent growth for all packaged food sales, according to London-based market researcher Euromonitor International Ltd.

By combining Parmalat with its Italian business, Lactalis may be able to generate 100 million euros of “synergies,” according to Andy Smith, an analyst at MF Global in London. Lactalis bought Italian brand Galbani in 2006 and that brand and President together account for about a third of its total 9.4 billion euros in sales, about 60 percent of which come from outside of France, according to Lactalis.

As a standalone company, analysts estimate that per-share earnings at Parmalat will decline 33 percent this year, according to data compiled by Bloomberg.

While traders that profit from mergers and acquisitions haven’t pushed Parmalat’s shares above Lactalis’s offer price -- indicating they don’t anticipate a competing bid -- Lactalis still has room to increase its offer to fend off any potential rivals, according to MF Global’s Smith.

“One and one isn’t going to equal two, it will be more like three,” with Lactalis and Parmalat, said Marco Elser, a partner at AdviCorp Plc, a London-based investment banking firm. With the cash and cost cuts, “Lactalis will be able to pay itself back for this acquisition,” he said.

Overall, there have been 7,960 deals announced globally this year, totaling $778.9 billion, a 25 percent increase from the $623.2 billion in the same period in 2010, according to data compiled by Bloomberg.

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