Pressure on Bega to deliver $40m a year cost savings from Lion deal

Analysts have generally praised the acquisition, which makes Bega Australia’s second-biggest dairy company.

Analysts have generally praised the acquisition, which makes Bega Australia’s second-biggest dairy company.

Bega Cheese shares have soared as much as 8.5 per cent as investors cheer its biggest acquisition, buying Lion’s dairy and drinks business for $534m.

But the company is under pressure to deliver on its $40m a year cost-saving targets after spending half its market capitalisation on the deal, which will deliver Bega a suite of well known brands, including Big M, Farmers Union, Dairy Farmers and Pura.

Analysts have generally praised the acquisition, which makes Bega Australia’s second-biggest dairy company, processing 1.7 billion litres of milk a year, behind Saputo’s 2.6 billion litres and just ahead of Fonterra’s 1.5 billion.

It will also lift Bega’s high-value and more stable branded sales from 59 per cent to 80 per cent.

But the company initially failed to deliver on its targets when it acquired most of Kraft’s Australian operations, including Vegemite, from Mondelez for $460m in 2017.

“We believe the main risks of this transaction for Bega are the normal acquisition risks of paying too much, poor integration and execution, not realising the expected synergies and new business risk,” Morgans analyst Belinda Moore said in a note to investors.

“We note that Bega didn’t deliver its initial targets for the Mondelez grocery business. Lion Dairy and Drinks is Bega’s largest acquisition to date and the purchase price represents 49 per cent of its market cap pre this announcement. Fresh milk is also a tough business, competing against low-priced private label milk.”

The $534m acquisition pales in comparison to the $2.9bn Lion paid for the dairy when it acquired National Foods in 2007. It is also $66m less than what China’s Mengniu Dairy was willing to pay for the business before the Morrison government vetoed the proposal, citing foreign investment concerns. Goldman Sachs analysts Michael Peet and Sophie Carran said the acquisition of Lion Dairy and Drinks was a “good strategic fit for Bega”, but agreed it needed to deliver on its synergy targets.

“Bega expects the transaction to be double-digit EPS (earnings per share) accretive in the 2022 financial year,” the pair wrote in a note to investors.

“In our view the proposed Lion Dairy and Drinks acquisition should be a good strategic fit for Bega, but delivery of the synergies will be key to the EPS accretion.”

Bega’s shares soared by 8.5 per cent in early trade on Friday after emerging from a trading halt, during which it raised about $284m from institutional investors to help fund the acquisition, which will create a $1.5bn company.

The company’s shares later closed 7.1 per cent higher at $4.42.

The capital raising, priced at $4.60 a share, resulted in 62 million new shares being issued and the company will now seek to raise an additional $120m.

Lion chief executive Stuart Irvine said the sale would allow the company to focus on its alcoholic drinks business. “The retained Lion business has a clear strategy to become a leading global, crafted adult drinks business,” he said.