Shares in organic baby formula retailer Bellamy's Australia Ltd (ASX: BAL) are up 7% to $4.57 in afternoon trade after takeover activity in the sector increased with leading U.S. baby formula business Mead Johnson receiving a takeover offer at a near 30% premium to its market valuation.
The willingness of global household goods giant Reckitt Benckiser to stump up a huge premium for Mead Johnson suggests this is still quite a hot sector, despite Bellamy's losing its own growth formula in the second half of 2016.
Mead Johnson is the second-largest baby formula business in the world behind Nestle and one of many operators seeking to grab a share of the growing baby formula markets across Asia in particular.
The core driver of the sector's long-term growth prospects is growing Chinese demand as the single-child policy is scrapped and birth rates reportedly increase by mid-to-high-single digits annually.
Bellamy's main baby formula rival in Australia, the a2 Milk Company Ltd (ASX: A2M), is also continuing to report phenomenal sales growth thanks largely to growing demand for its formula in China, which suggests the underlying demand growth remains strong.
A2 Milk's share price has rebounded 17% over the past month thanks to renewed enthusiasm for the sector and I expect it too is a possible takeover target for a giant multi-national like Unilever that could buy a2 Milk with barely an impact to its balance sheet strength.
Bellamy's recent problems have resulted in a power struggle at the company with a group of investors looking to spill a board that has overseen management's strategic blunders in contributing to the company's multiple own goals.
Bellamy's problems have also been attracting plenty of short interest in the stock recently with UBS acting as the prime broker in lending out its stock to hedge funds to short. That's no surprise given Bellamy's valuation, inventory build up, cash flow issues, balance sheet weakness, overhanging legal actions, and boardroom battles likely to distract it from getting back to business.
For those reasons, among many others, I'm not a buyer of Bellamy's shares today even if the company may still have a decent long-term future.
Today's sharp price rise could be caused by day traders, short sellers closing out their positions, takeover rumours fuelled by the Mead Johnson deal, or speculation as to the likely winner for control of the company. Given the uncertainty I'm surprised at today's share price rise and think this looks a story to watch from the sidelines for now.
