News out today has Freedom Foods Group Ltd (ASX: FNP) making a bid for A2 Milk FPO NZ (ASX: A2M), which has implications for other ASX-listed dairy companies.
My colleague Owen Raskiewicz covered the news in more detail here, but what is surprising is that A2 Milk had only been listed on the ASX since 31 March 2015. That news alone suggests Australian and New Zealand dairy and dairy products companies might not last long if they list on the ASX.
That obviously raises questions for Australian Dairy Farms Group (ASX: AHF), which has only been listed since October 2014 and Bellamy's Australia Ltd (ASX: BAL), which listed in August 2014.
Are they on predator's watch lists?
In my view, they very well could be.
In 2013 Canadian dairy giant Saputo engaged in a 3-way battle with Bega Cheese Ltd (ASX: BGA) and dairy Cooperative Murray Goulburn for control of Warrnambool Cheese & Butter Factory Co. (ASX: WCB). Saputo eventually triumphed – if you could call it that – after gaining control of 87% of the company, just shy of the 90% it needed to achieve compulsory acquisition. Warrnambool's shares still trade on the ASX – but you'd be hard pressed to find many sellers. Lion still holds around 10% of Warrnambool shares, and declined to sell out to Saputo.
Since 2013, Bega's shares have gone close to doubling, and it could still be on the radar of a number of companies seeking entry to Australia and New Zealand's dairy sector. Likewise Australian Dairy and Bellamy's.
Bellamy's mainly provides organic milk products for babies and toddlers and exports its products into the vast market of China.
Australian Dairy currently owns 7 dairy farms in South Western Victoria, having started with just 2 farms when it listed on the ASX in October 2014. Interestingly, both Murray Goulburn and Warrnambool operate close to that region of Victoria.
Production has grown from 10 million litres per year, with a recent acquisition of 3 farms doubling production to 20 million litres per annum.
The big attraction for investors in these companies is the high-quality milk and dairy products they produce and the potential to export some produce as well as for domestic consumption.
It's also no surprise that cooperative Murray Goulburn is seeking a listing on the ASX while demand for dairy investments are high. But the cooperative is likely to make a takeover of the company difficult by having two classes of shares, with public shares having no voting rights. This is a similar structure to Fonterra ORD UNIT (ASX: FSF), the world's largest dairy exporter, based in New Zealand.
What is particularly pertinent for Australia's dairy producers is the recently signed Free Trade Agreement (FTA) with China. Tariffs of up to 20% on dairy products will be eliminated within 4 to 11 years, making exported milk and dairy products more competitive in China. And Australian and New Zealand dairy products already have a high standing in China thanks to the very high quality.
You might want to keep your eye on these dairy producers.
