A2 Milk back on takeover radar as it struggles with loss of daigou trade

A2 Milk CEO David Bortolussi. Picture: Britta Campion

With A2 Milk shares stuck firmly in the doldrums, market chatter suggests the battered dairy supplier could be back on the radar of potential suitors keen for a slice of the premium margins the company’s products command.

Over the past year, A2’s market capitalisation has plunged from close to $14.8bn to $5.3bn, as the moribund daigou trade market between China and Australia bites into the company’s earnings.

Goldman Sachs analyst Belinda Moore last week told clients that A2 faced another earnings downgrade if the trade didn’t pick up, saying market soundings suggest the dairy major was likely to miss earnings forecasts and warning that a fourth downgrade “would be another blow to A2’s credibility”.

The daigou trade that sent A2 shares soaring before the pandemic was partly the result of students and travellers buying product in Australia and sending it home to China, and in part is the result of more organised traders that deal with producers such as A2 directly.

But travel restrictions have limited the former, and China’s hostility to Australia the latter, and the possibility of “corporate activity” is one of the few potential upsides for A2 shareholders on the horizon, according to Ms Moore.

As A2’s woes have deepened, market chatter has grown that big overseas food giants such as Nestle and Mead Johnson are sniffing the wind on a potential move on the dairy producer.

Both have introduced their own range of infant formula using the A2 strain of milk popularised by the New Zealand and Australian product pioneer in recent years, but have struggled to challenge A2’s position in the market.

Ironically, Nestle could have acquired A2 for a lot cheaper than its current market cap of $5bn. In the early 2000s, A2 founder Corran McLachlan travelled to Switzerland with co-founder Bob Elliott in an effort to convince Nestle executives of the validity of the science and see if they could strike a commercial arrangement. But they came back empty-handed.

A2 was also a takeover target for Freedom Foods and an unnamed international dairy company in 2015, when it was capitalised at only $325m.