Goodman Fielder: Takeover target?

Big supermarkets pressure proprietary brand suppliers

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Goodman Fielder Limited (ASX: GFF) could be on the takeover target list, according to Deutsche Bank, if the company manages to sell its fats and oils business, Integro.

The company announced yesterday that plans to sell Integro as well as its NZ milling business are well underway and discussions are ongoing with a number of parties. The company expects to provide an update on the divestment of both businesses by the end of August 2012.

Deutsche expects that Wilmar International, a Singaporean company specialising in oils, rice, flour and grain production and owner of 10.1% of Goodman Fielder, may make a bid for the remainder of the company it doesn’t already hold.

Goodman Fielder has been under increased competitive pressure including price reductions for supermarket private label bread and the resulting pricing pressure on its proprietary branded bread.

SPC Ardmona, owned by Coca-Cola Amatil (ASX: CCL) is also likely to be facing similar pricing pressure on the products it sells to the big supermarkets, while daily product suppliers Bega Cheese Limited (ASX: BGA) and Warrnambool Cheese And Butter Factory Company Holdings Limited (ASX: WCB) are in the same basket (sorry!).

Warrnambool warned at the beginning of June 2012, that its full year net profit before tax was likely to be 20-30% below the previous year’s result, mostly thanks to lower market prices, although 50% of its products are sold internationally.

Bega Cheese advised the market in June that milk pricing was down 7.5%, and in April announced that it was supplying Coles – owned by Wesfarmers Limited (ASX: WES), with cheese for its private label brands.

The big supermarkets are increasing the percentage of sales from private label brands, and squeezing proprietary brands off the shelf, or extracting price cuts from manufacturers and suppliers.

What is interesting about private label sales is that during stable economic times, private label sales tend to decline, while sales by cafes, restaurants and takeaways rise. During tough economic times, private label sales rise, while cafe, restaurant and takeaway sales fall (according to a Bega Cheese Presentation). The major retailers may be hoping for the tough times to continue for a bit longer, to drive their private label sales higher.

Back to Goodman Fielder. The company has seen its share price fall by more than 50% since July 2011, as Goodman Fielder undergoes a major restructure of its business, with the company forecast to report a more than $100m loss for the 2012 financial year due to one-off expenses and impairment charges. Whether the company returns to profit in 2013 remains to be seen.

The Foolish bottom line

Shareholders may be hoping to see a white knight appear, if and when the company sells its fats and oils business.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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