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Bubs share price lower despite announcing a major acquisition

The Bubs Australia Ltd (ASX: BUB) share price has returned from its trading halt and dropped lower this morning.

At the time of writing the Bubs share price is down 2.5% to 78.5 cents.

Why was the Bubs share price in a trading halt?

Bubs requested a trading halt on Friday whilst it prepared an announcement relating to an acquisition and associated capital raising.

This morning the company announced that it has entered into a conditional sales and purchase agreement to fully acquire infant formula producer Australia Deloraine Dairy (Deloraine) in Melbourne, Victoria.

According to the release, the company has agreed a consideration of $25 million in cash and $10 million in shares at a strike price of 65 cents per share. These shares will be escrowed for 12 months.

In addition to this, if certain performance targets are met, there will be further payments of up to $15 million to the Deloraine vendors. This will be paid annually in equal instalments over three years.

In order to fund the acquisition, Bubs has entered into an agreement for a private share placement with private equity firm C2 Capital Partners. The agreement will see Bubs raise $31.44 million, before costs, at 65 cents per share.

Why is Bubs buying Deloraine?

As I mentioned here last week, Deloraine appeared to be an obvious choice for the company. It already had 5-year manufacturing agreement with the Dandenong-based company and acquiring it was likely to create value through margin expansion.

Deloraine is one of only 15 licensed canning facilities in Australia authorised by the Certification and Accreditation Administration of China (CNCA) for physical importation into the country under regulatory requirements administered by State Administration for Market Regulation (SAMR).

Bubs founder and chief executive officer, Kristy Carr, believes the acquisition is an important step.

She said: “This is a key foothold in Bubs vertical-integration strategy to maximise control of our supply chain and represents an important step in our vision to expand our China business. Importantly, the acquisition will have a significant positive impact on our business through a material reduction in our production costs, as well as placing Bubs in the best possible position to achieve SAMR brand registration.”

She added: “The planned integration of Deloraine underpins Bubs unique competitive advantages deriving from authentic provenance, including 100% Australian goat milk with full traceability back to farm gate, and scalable capacity to increase volume to meet growing future demand.”

What now?

I think this is a good move by the company and feel it is well-positioned for long term growth, if demand for its products is there.

Whilst I’m optimistic that goat milk infant formula will go down well with Chinese consumers, there’s no guarantee that it will.

In light of this, I plan to stick with A2 Milk Company Ltd (ASX: A2M) and Bellamy’s Australia Ltd (ASX: BAL) for now and will wait to see how things progress for Bubs over the next 12 months before considering an investment.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. The Motley Fool Australia has recommended Bellamy's Australia and BUBS AUST FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insightsmakes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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