Implications of a2 Milk's NZ$270m offer to acquire Mataura Valley Milk

A look at a2 Milk’s latest acquisition plans

a2 Milk (A2M) today revealed that it has made a non-binding offer to acquire a significant stake in the New Zealand dairy nutrition business, Mataura Valley Milk – in a deal valued at NZ$270 million – aimed at helping the company expand its manufacturing capacity.

Though non-binding, A2M has been provided a period of exclusivity as it conducts due diligence and negotiates finalised transaction documentation.

Importantly, it was flagged that Mataura’s current majority shareholder – China Animal Husbandry Group, a subsidiary of China National Agriculture Development Group, which itself is the parent company of one of A2’s key Chinese partners – supports the acquisition plans.

In its current form, should the acquisition be completed, a2 Milk would hold a 75.1% stake in Mataura, while China Animal Husbandry Group would hold a 24.9% stake.

Ultimately, this acquisition announcement should come as little surprise to observant onlookers, with A2M in its full-year results this week announcing that it was currently reviewing its capital allocation framework, with a focus towards long-term growth opportunities.

Indeed, as A2M’s current Chief Executive Officer, Geoff Babidge, noted in today’s ASX release: the planned Mataura acquisition 'Aligns with this strategic objective as we look to compliment and build upon our current strategic relationship with Synlait Milk and Fonterra Co-operative Group.’

Looking forward, Mr Babidge added that 'Our intention would be to invest further to establish blending and canning capacity at Mataura's facility to support the establishment of a fully integrated manufacturing plant for infant nutrition.’

The company noted that this acquisition would be funded through current cash reserves, which stood at NZ$854.2 million, at the close of fiscal 2020.

Even though the deal remains incomplete, the company aims for the transaction to be finalised towards the end of fiscal 2021.

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Revisiting the FY20 results

The market responded with little enthusiasm when a2 Milk reported its full-year (FY20) report this week, with the stock collapsing 6.3% – to $18.25 per share – on the day of the announcement.

The key takeaways from A2M’s FY20 report were:

• Total revenue of NZ$1.73 billion, up 32.8%
• Earnings (EBITDA) of NZ$549.7 million, up 32.9%; against an EBITDA margin of 31.7%
• Profits (NPAT) of NZ$385.8 million, up 34.1%.
• FY21 EBITDA margins guided to come in at 30-31%, while FY21 revenue is expected to remain strong, driven by 'continued investment in marketing and organisational capability.'
• FY21 CAPEX has been guided at NZ$50 million.

Click here to read our complete summary of A2M’s FY20 Report.