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Halt! Why Freedom Foods Group Ltd shares are frozen today

This morning, shares of Freedom Foods Group Ltd (ASX: FNP) entered a trading halt following an announcement by the company that it intends to raise $75 million to fund four acquisitions.

Shares of Freedom Foods will remain in a halt until 9 December 2016, as the company undertakes the institutional component of its raising. Of the $75 million, $10 million of shares will be issued to institutions while the other $65 million is up for grabs for current investors (like you).

The retail component is a ‘pro rata accelerated non-renounceable entitlement offer’ of 2-for-25 at $4.45. That means, for every 25 shares you currently hold, you can buy another two at $4.45 each. If you do not take up the offer however, the underwriter, Veritas Securities, will pick up the slack.

The acquisition proceeds will be used to fund four acquisitions and other growth initiatives. The acquisitions include:

  • A 50% interest in Pactum Dairy Group (PDG) for $50 million. PDG is a producer of dairy products, which will provide the company with better exposure to the growing demand of Asia. PDG was set up as a joint venture in 2014 by Freedom Foods and Australian Consolidated Milk (ACM). ACM will continue on as a partner of the Shepparton based processing plant, with a 10-year supply agreement expected to be made. Freedom Foods will seek to expand the operations in Shepparton, including logistics and processing.
  • A sports and adult nutrition brand for $20 million. Freedom Foods expects to buy an Australian-based brand owner in the sports and adult nutrition categories. The company will use its supply networks through Australia and Asia to boost the business. It is expected to be earnings accretive in 2018.
  • A North American cereal and snacks company. Freedom Foods described it as “a fast growing brand with products delivering strong nutritional credentials to its targeted family consumers.” The brand is expected to be earnings accretive in 2018.
  • A 10% ownership of Australia’s Own Dairy Company China (AO China) for $4.3 million. Freedom Foods will align with Shenzhen JiaLiLe Food Company Ltd to strengthen links in China. Under the deal, Freedom Foods will have the option to subscribe for up to 30% of AO China in three years.

Outlook

Freedom Foods said the commissioning of its new plant and facilities at Ingleburn in the second half of 2017 will boost sales and profitability from its 2019 financial year onwards. It also painted painted a rosy outlook for its Dairy, Cereal, Snacks and Milling businesses with increasing sales growth and profitability.

“The Company anticipates the ongoing benefits of the strategy and its multi stage capital investment program to accelerate increased group profits and returns in FY 2017 and beyond,” the business said.

Foolish takeaway

Freedom Foods operates in an attractive niche and today’s announcement appears to be geared towards padding out both the upstream and downstream capabilities of the broader company. However, the business appears loaded with long-term potential and even if it can get its Asian strategy right its shares are priced to perfection. Given the shock falls of Bellamy’s Australia Ltd (ASX: BAL) are still fresh in the memory of most investors it would be wise to be cautiously optimistic on the company’s Asian strategy.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes -- and encourages -- your feedback on Google+, LinkedIn or you can follow him on Twitter @ASXinvest.

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.

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