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Tuesday October 17, 2006

F&N buying Nestle milk ops

PETALING JAYA: Fraser & Neave Holdings Bhd (F&N) will fork out about RM310mil to buy Nestle’s liquid milk business and, in the process, double F&N group’s dairies operations and expand its regional footprint. 

F&N chief executive officer Tan Ang Meng said the deal would increase the dairies division’s annual turnover to over RM1.5bil from RM600mil now. 

“Although we have taken a very big step, we are very excited with this opportunity to open up Indochina to F&N. The deal, which took us two years to negotiate, will boost top line by about RM900mil (on a full-year basis). 

“In terms of profit margin, typically the group’s dairy business has been generating earnings before interest and tax of 5% to 7%,” he told StarBiz

According to Tan, the acquisition would turn the dairies division into the group’s biggest revenue generator, overtaking the soft drinks division, which currently makes RM1bil. 

“However, in terms of margins, the soft drinks division will still be better but dairies won’t be far behind,” he said. 

In a filing with Bursa Malaysia yesterday, F&N said that as part of the package, the group would assume control of Nestle’s canned liquid milk, UHT and chilled dairy and juice business in Thailand. 

At present, Nestle has leading positions in the condensed, evaporated and sterilised milk markets in Thailand via the Carnation, Milkmaid and Bear brands. As part of the deal, these brands will be licensed to F&N, which will also acquire relevant Nestle production facilities and equipment in Thailand. 

Nestle will sell the Tea Pot sweetened condensed milk brand to F&N and license F&N to manufacture and distribute Nestle’s Ideal, Carnation and Milkmaid brands in Malaysia, Singapore and Brunei. 

Nestle will also divest its 25% stake in F&N’s Malaysian manufacturing subsidiary, Premier Milk Sdn Bhd, one of the largest condensed milk factories in the region. 

To avoid any disruption to the market, F&N will retain Nestle’s services to continue present distribution arrangements in Malaysia and Singapore for three years. 

The deal, which will be financed with internally funds and borrowings and subject to relevant approvals, is expected to be completed by Feb 1, 2007. 

Tan said Thailand, with a population 2.6 times larger than Malaysia's, offered tremendous opportunity for quantum growth of the dairy and food industry. 

He added that the relatively untapped markets of Indochina and Myanmar, with a combined population of 150 million, would provide a future source of growth for Nestle and F&N brands. 

“In one stroke, we have gained access to a large population base and reduced our dependence on the relatively small Malaysian market, which augurs well for the future of F&N. 

“It also enables consolidation of the canned milk category and brings economies of scale to our manufacturing operations during a period of escalating costs of packaging and raw materials such as skim milk powder and sugar,” he said. 

AmResearch analyst Muhamad Khair Mirza said the acquisition was positive for F&N. 

“It is a good investment for F&N in the medium to long term as it provides the group with regional growth. However, growth would be incremental – earnings are not expected to grow by leaps and bounds,” he said. 

He added that F&N would have to overcome challenges to grow its business in Indochina. 

Nestle (M) Bhd, in a separate statement, said the transaction – which would affect its turnover in the short term but not its net profit – was expected to add operational efficiencies and allow it to focus on key brands. 

Managing director Sullivan O’Carroll said: “This business transaction will strengthen Nestle’s operations in Malaysia, Singapore and Brunei and provide the company with greater momentum for a stronger presence in the region by allowing us to focus on other value-adding categories that offer new prospects and opportunities.” 

F&N shares, which were suspended yesterday, closed at RM6.35 last Friday. 

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