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

We examine the details behind the company’s latest acquisition plans as well as briefly look at its FY20 results.

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.

How to trade a2 Milk, long and short

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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.

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