Saputo eyeing additional acquisition opportunities

by Eric Schroeder
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MONTREAL — Saputo Inc., the largest dairy processor in Canada, has won the bidding battle for Warrnambool Cheese and Butter Factory Co. Holdings Ltd., one of Australia’s largest milk processors. Now the company has its sights set on other acquisition targets, including opportunities in the United States.

As of Feb. 4, Saputo had obtained a 78.943% interest in Warrnambool shares. Based on the current issued share capital of Warrnambool, 100% of the shares of Warrnambool would be valued at approximately C$520 million. The offer is scheduled to close on Feb. 12.

The announcement came just a few weeks after Saputo entered into an agreement to acquire the fluid milk activities of Scotsburn Co-Operative Services Ltd. based in Nova Scotia.

But Saputo’s interest in expanding its reach really kicked off in January 2013, when the company completed its acquisition of Morningstar Foods, L.L.C., a subsidiary of Dallas-based Dean Foods Co., for $1.45 billion. Lino Saputo, vice-chairman and chief executive officer of Saputo, said shortly after the acquisition’s closing that it ‘opened up the dairy world’ for Saputo.

The company sees no reason to slow down.

“I’ve said that we always have three or four files on our desk at any given time,” Mr. Saputo said during a Feb. 6 conference call to discuss third-quarter results. “For us, they’re all pressing and they’re all exciting. We materialized two acquisitions in the span of maybe three or four months: Warrnambool and Scotsburn. These are files that we’ve had on our table and ideas and priorities that we’ve been thinking about, in some cases, in Warrnambool, for the better part of 10 years and the opportunity came along for us to actually make a play for it.”

The runway still is “very, very long,” he added.

“I see that in the U.S. space both on the cheese and on the dairy foods side despite our size, we represent a small percentage of the overall volume, so I think that there could be some other potential acquisitions in the U.S.,” Mr. Saputo said.

The acquisition of Morningstar (renamed Saputo Dairy Foods USA, L.L.C.), paid off in the first quarter of fiscal 2014. EBITDA in the USA Sector of Saputo in the quarter ended Dec. 31, 2013, totaled C$121.1 million ($109.7 million), up 50% from C$81 million in the same period a year ago. Revenues totaled C$1,138 million ($1,031 million), up sharply from C$663.6 million a year ago.

Saputo said it continues to pursue volume growth and evaluate opportunities in the specialty cheese category within the USA Sector. Additionally, improved efficiencies in both manufacturing and distribution facilities across the United States remain a priority in fiscal 2014, the company said.

In addition to the United States, Mr. Saputo mentioned Brazil and New Zealand as potential targets.

“We’re exporting product from Argentina into Brazil, and so it’s a natural evolution for us to be a player with manufacturing infrastructure in Brazil,” he said. “We just need to find the right one at the right price with the right strategic value for us. Beyond that, I’d say now with Warrnambool we have a strong, solid platform in Australia, perhaps if there could be some other small tuck-in businesses in Australia we would be more than happy to look at it now that we have a management team that would be able to absorb it and manage it and run it. And I would also say that New Zealand looks pretty interesting for us as well, now that in Oceania we do have that infrastructure.”

Overall, net earnings at Saputo in the third quarter ended Dec. 31, 2013, totaled C$144.1 million, up 11% from C$130 million in the same period a year ago. EBITDA totaled C$260 million, up from C$212.5 million. Revenues increased 30% to C$2,343.2 million from C$1,800.6 million.
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