June 24 (Bloomberg) -- Grupo Lala SAB, Mexico’s largest milk producer, is among the bidders for BRF SA’s dairy business in Brazil, people with knowledge of the matter said.
French food producers Danone and Groupe Lactalis SA also expressed interest in the unit, one of the people said, asking not to be identified discussing private information. Lala is working with Grupo BTG Pactual on its bid, one person said.
Brazil’s biggest food producer is auctioning its dairy unit to focus on its meat business, Chief Executive Officer Claudio Galeazzi said in a June 11 interview. The business commands about 15 percent of Brazil’s milk sales, according to data compiled by Euromonitor International. Galeazzi said the division would provide foreign buyers with instant scale in a market with high barriers to entry.
“For a company like Lala to get into Brazil, they’d have to buy local brands,” Miguel Mayorga, a Latin America food analyst at Mexican brokerage Corporativo GBM SAB, said in a telephone interview. “Otherwise, introducing the Lala brand into Brazil would be very difficult. They have the tools and the know-how, but it would take time.”
BRF generated about 2.8 billion reais ($1.3 billion) sales from dairy products last year, according to its annual report. Based on the 1.89 median price-to-sales multiple paid for emerging-market dairy producers in the past five years, the unit could fetch 5.3 billion reais, according to data compiled by Bloomberg. BRF, with market value of about 46 billion reais, trades on the Brazilian stock market at about 1.5 times sales.
BRF rose 1.9 percent to close at 53.20 reais today in Brazil, after climbing as much as 2.4 percent. Lala slipped 1.2 percent to 34.41 pesos, giving it a market value of about 85.1 billion pesos ($6.5 billion).
BRF’s market position was helped by the popularity of its brands Batavo and Elege among consumers, according to Euromonitor. Milk product consumption in the market is projected to register a compound annual growth rate of 6 percent per year through 2018, the report shows.
Lala is looking for growth opportunities abroad after raising 14.1 billion pesos in an initial public offering in October, Chairman Eduardo Tricio said in an interview last year. Founded as a dairy collective in 1949, Lala used M&A in Mexico to push annual revenue to 43.2 billion pesos in 2013. Lala had about 9.94 billion pesos in cash and equivalents as of March 31, according to a first-quarter report posted on its website.
While he would prefer to see Lala’s cash deployed in a more familiar market such as Central America, GBM’s Mayorga said acquisition opportunities aren’t so common in the Latin American dairy business.
“It’s not easy to find targets in these regions,” he said. “Lala needs to buy something, because the amount of cash they have isn’t generating the value that shareholders want.”
Lala now controls more than half of Mexico’s milk market, according to company reports citing research by A.C. Nielsen.
A press official for Lala declined to comment on the BRF dairy unit, saying the company is constantly evaluating opportunities in Mexico and abroad. Spokesmen for Lactalis and BTG declined to comment, while representatives for Danone and BRF didn’t reply to requests for comment.
Galeazzi, named CEO in August, is selling the dairy assets as part of his mandate to boost productivity in existing operations and expand overseas. He said there were about 10 or 11 non-disclosure agreements signed in the initial phase of the auction, and the process has since advanced to a second phase. Banco Itau BBA SA is managing the sale for Sao Paulo-based BRF, he said.
The interested parties are “very strong companies that want to come to Brazil,” Galeazzi said. “Our expectation is that we sell it because all strategic investors outside Brazil have a natural entry barrier.”
To contact the reporters on this story: Gerson Freitas Jr. in São Paulo at firstname.lastname@example.org; Jonathan Levin in Sao Paulo at email@example.com; Cristiane Lucchesi in Sao Paulo at firstname.lastname@example.org