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Competition mounts in baby formula sector with new IPO

After the phenomenal share price and sales increases reported by Bellamy’s Australia Ltd (ASX: BAL) since its debut, it’s inevitable that imitators came out of the woodwork, with everybody wanting a piece of the baby formula pie. Blackmores Limited (ASX: BKL), Bega Cheese Ltd (ASX: BGA), and A2 Milk Company Ltd (Australia) (ASX: A2M) are all getting into the act, although Blackmores and A2 are just getting started with their Chinese sales.

Dairy co-operative Murray Goulburn also recently announced the construction of a new plant and baby formula exports to Indonesia and the US.

Now Fairfax Media is reporting that private equity firm PAC Partners is looking to attract $150m worth of pre-IPO funding by the end of the month, for its upcoming Initial Public Offering (IPO) of Camperdown Dairy International.

According to Fairfax’s figures, Camperdown is set to earn $50 million in Earnings Before Interest, Tax, Depreciation, and Amortisation (EBITDA) in 2017, and would be valued at around six to eight times its forecast earnings. At that price, shares are likely to be in hot demand during the eventual IPO process.

The real worry comes for shareholders in Bellamy’s, A2, Blackmores and all the rest as new players enter the market, production rises and competition intensifies. Sure, China is large enough to support a large number of brands, but what happens when a consumer is faced with six or seven choices of baby formula on the shelf?

Do they buy the cheapest? The one all their friends are using? The biggest brand presence? Made in Australia? The ones that are sold online at Alibaba?

Some companies, like A2, could have a competitive advantage as a result of the health-related benefits that A2 proteins reportedly deliver. Bellamy’s and Blackmores could have a brand-related advantage, while Bellamy’s could also have a first-mover advantage in building its market presence. Those that conserve capital by outsourcing their production could also have an advantage in ramping up their marketing and distribution spending.

The addition of another player to the market isn’t an investment thesis-changing development, but it is worth keeping an eye on how your company stacks up against the competition in terms of all of the above points, as well as things like financial position, quality of management, cost base, and so on.

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Motley Fool contributor Sean O'Neill owns shares of A2 Milk. The Motley Fool Australia owns shares of Bellamy's Australia. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.