“BUSINESS as usual” is the message Lion Dairy and Drinks (LDD) has passed to its 29 WA dairy farmer suppliers after parent Lion announced the dairy division is for sale.
A Lion spokeswoman said LDD’s farm services team started contacting its supplier farmers in WA to let them know what was happening as soon as Lion’s intention to put LDD up for sale was announced simultaneously in Sydney and Tokyo last week.
The spokeswoman confirmed LDD’s relationship with its dairy farmer suppliers remained “very much business as usual”.
She also confirmed Lion was looking to sell LDD and its milk, cheese, yoghurt, fruit juice and plant-based beverage processing assets and brands as a unit, rather than breaking the division up and selling off individual operations.
“The strategy we announced is based on selling the whole business, that’s the way the company is looking at proceeding,” the spokeswoman said.
In WA LDD produces Masters and Pura brand white milk, Masters and Dare brand iced coffees and flavoured milks and Pura cream at processing facilities in Bentley.
In February its Masters High Lo was named Champion White Milk Drink at the prestigious 2018 Australian Grand Dairy Awards in Melbourne.
Originally established in WA in 1959, the Masters brand was relaunched by LDD in 2016, replacing Eastern States’ Pura milk branding on local supermarket shelves.
LDD has just completed a $43 million three-year upgrade of the Bentley plant, including the introduction of one-way packaging replacing returnable plastic milk crates, a new filling line with increased capacity and a new centralised despatch cold store.
Former distribution depots at Balcatta and Palmyra were sold off to help pay for the upgrades and 30 staff involved in product distribution were made redundant.
As part of the overhaul, LDD bundled its products distribution and outsourced that aspect of its WA business to Linfox Logistics.
Similar core modernisation and asset rationalisation has occurred in other States under LDD’s ‘Turnaround’ program introduced in 2014.
LDD managing director Kathy Karabatsas and agricultural procurement director Murray Jeffrey were scheduled to attend WAFarmers’ 2018 dairy conference in July.
It was thought while they were here, they would attend a ceremony at Bentley to acknowledge completion of the upgrades, but both cancelled trips to WA and did not attend the conference.
LDD holds the biggest volume retail milk supply contract in WA, processing and packaging $1-a-litre own brand milk for Coles Supermarkets.
It won the five-year Coles contract, which has a further five-year option, from Harvey Fresh in September 2015 after Coles used the technicality of change of owner when Parmalat took over Harvey Fresh, to swap suppliers.
When $1-a-litre milk was introduced in 2011, LDD originally supplied Woolworths but lost that contract to Brownes Dairy in 2014.
Through the WA dairy industry turmoil and rapid reduction in dairy farm numbers of the past two years, LDD has appeared a model of consistency.
While Brownes Dairy let some of its best suppliers go at the end of September 2016 by not exercising contract options and Parmalat demanded its Harvey Fresh dairy farmers produce 10 per cent less milk in 2017, LDD offered good prices and introduced two-year fixed pricing.
Its suppliers knew two years in advance what their farmgate price would be while farmers supplying other processors wondered whether there would be a home for their milk in two years.
LDD also offered its WA dairy farmer suppliers the choice of one, three or five-year contracts.
The LDD spokeswoman said most of its suppliers opted for three-year contracts which still have two years to run.
From July 1, LDD has paid its WA farmers a weighted average price of 50 cents a litre for milk and announced it will be extending this price into 2019-20 in accord with its two-year fixed pricing policy.
LDD is a wholly-owned subsidiary of Lion which in turn is a wholly-owned subsidiary of Japanese international brewer, pharmaceuticals and biochemicals company Kirin Holdings Company Ltd.
It has a share capital of about $552 million, according to Kirin.
It was created after Kirin bought National Foods in 2007 and brewer Lion Nathan in 2009 and merged the two, changing the business name in 2011 to Lion with the former National Foods division becoming LDD.
Lion chief executive officer Stuart Irvine and Kirin president and chief executive Yoshinori Isozaki last week announced Lion’s “intention to commence a sale process” for LDD.
Their statements confirmed what had been speculated for a month since Lion announced a strategic review of LDD.
“Following careful consideration, we believe a sale of LDD is the best option to set both Lion and LDD up with the capital and resources needed to grow into the future,” Mr Irvine said.
“It’s clear from the further work done in recent weeks that LDD’s strategy to more fully leverage growing consumer wellness trends will require new capabilities and capital investment (LDD has pledged to cut about nine tonnes of salt, 1400 tonnes of sugar and 600 tonnes of fat a year from its products without compromising taste or quality).
“The sale process will focus on finding the right owner to take LDD forward and unlock its full potential,” he said.
But Mr Isozaki’s statement made it clear Kirin had given up on notoriously thin margins in dairy processing to concentrate on chasing a lion’s share of much more lucrative margins in craft beers in the Oceania region.
“In order to maximise the business value of Lion, as well as the shareholders’ value of Kirin, we recognise we should prioritise accelerating investment in the higher-margin and high-growth craft beer category in Oceania and global markets, along with Lion’s emerging premium crafted beverage portfolio in Oceania, where we have ample growth opportunities,” Mr Isozaki said.
The strategic review announced on September 11 “had given consideration to all potential options for LDD, including retaining and investing in the business and a sale of LDD” before it was decided to offer LDD for sale, he said.
The process will commence immediately with Deutsche Bank co-ordinating the sale and King & Wood Mallesons as legal adviser.
Greenhill & Co Australia has been appointed as independent financial adviser.
While Kirin or Lion have not disclosed what they think LDD is worth, some industry analysts and participants expect a sale price of about $800 million, but questions remain on whether it will ultimately be sold as a whole.
LDD owns some premium specialty cream and cheese brands such as King Island Dairy, South Cape and Tasmanian Heritage which could possibly realise more if offered separately without a high-volume, low-margin white milk business attached.
Offering the premium end of its dairy business separately might also make it more attractive to private equity investors, given private equity’s relatively uncomfortable foray into mainstream dairy processing via Archer Capital’s ownership until last year of Brownes Dairy.
Because of cold chain logistics and iced coffee and fruit juice product line similarities, plus a desire common with LDD to improve customer perceptions of how healthy their product range is, Coca Cola Amatil (CCA) has been touted as a potential buyer.
The fact CCA managing director Peter West was LDD managing director until the end of last year has added to the speculation.
Pacific Equity Partners (PEP), the largest private equity fund in Australia and New Zealand, is also tipped as a possible buyer of LDD.
PEP owned iconic ice cream brand Peters from 2012 to 2014 but its current investments are baking, Manuka honey, healthcare and education focussed.
