A2 Milk Company Ltd (ASX: A2M) shares are on watch this morning after confirming an acquisition.
What has happened?
The company is following through with its plan to buy a 75% interest in Mataura Valley Milk (MVM), which is a dairy nutrition business in Southland, New Zealand.
A2 Milk is attracted to the recently commissioned facility owned by MVM. The proposed acquisition will allow A2 Milk to manufacture products itself, provide supplier and geographic diversification, as well as strengthening relationships with key partners in Australia.
These arrangements are supported by MVM’s current majority shareholder, China Animal Husbandry Group (CAHG), which will retain a 25% interest in MVM alongside A2 Milk. CAHG is a wholly owned subsidiary of China National Agriculture Development Group, which is also the parent company of A2 Milk’s strategic logistics and distribution partner in China, China State Farm.
The 75% stake is going to cost A2 Milk NZ$268.5 million on a debt-free and cash-free basis. It’ll be funded from A2 Milk’s existing cash reserves.
Two other reasons why A2 Milk is considering this is that it will give the opportunity to produce additional infant nutrition products for China and other markets. It also gives A2 Milk the ability to capture the manufacturing margin.
There will be one-off transaction costs of around NZ$10 million for the acquisition.
Expansion plan
A2 Milk said that it has an expansion plan for the MVM facility, it plans to add a blending and canning facility, as well as the associated infrastructure. This will require around NZ$120 million over the first two to three years. An A1 protein free milk pool will also be developed.
Management comments
A2 Milk CEO Geoff Babidge said: “MVM provides a unique opportunity to acquire a new world-class nutritional product manufacturing capability in New Zealand, alongside a highly respected China state owned enterprise in China Animal Husbandry Group. We have worked closely with CAHG and MVM over recent months and have developed relationships with both teams that we are confident will provide a strong foundation for the business going forward.”
Summary thoughts
A2 Milk is a quality company and this is probably a good use of cash to diversify its manufacturing, but I don’t think it can materially alter the current problems – A2 Milk has a demand problem not a supply problem.
It’s still a high quality company, however the problems have been even worse than expected. Hopefully the company can get back to growth. This period could be a time to “be greedy when others are fearful”, as long as A2 Milk can reinvigorate its international growth again.
But there are ASX growth shares that are growing now that could be worth considering instead such as Pushpay Holdings Ltd (ASX: PPH).
