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Is the Bellamy’s takeover a signal to invest in infant formula?

On Monday it was announced that China Mengniu Dairy Company had made a takeover bid for Bellamy’s Australia Ltd (ASX: BAL) at a price of $13.25 per share. This price represented a 59% premium compared to the last close price of $8.32. Unsurprisingly, this news caused the price of Bellamy’s shares to skyrocket.

If the takeover is successful, Bellamy’s shares will no longer trade on the ASX. However, for Australian investors looking to gain exposure to the growing infant formula market there are still plenty of other options. These include A2 Milk Company (ASX: A2M), Bubs Australia Ltd (ASX: BUB), Synlait Milk Ltd (ASX: SM1) and Wattle Health Australia Ltd (ASX: WHA).

Is it the right time to invest in infant formula?

Prior to the Bellamy’s takeover announcement, I did not believe the market price for Bellamy’s shares constituted good value and therefore I would not have recommend investing. I hold a similar view for the remaining infant formula companies listed on the ASX. I am also concerned by the level of competition present in this industry.

The ASX listed infant formula companies must compete with a host of international competitors including Nestle, the world largest producer of infant formula. This is bad news for investors as competition usually drives down prices, margins and earnings of competing companies. Smaller companies can also be driven out of business by larger companies, which can survive for longer on lower margins.

Some of the ASX listed infant formula companies have attempted to distinguish themselves from the competition and I believe this is a smart move. a2 milk, for example, specialises in A1 protein-free milk products while Bubs’ infant formula is derived from goats’ milk. Unfortunately, it’s hard to know at this stage if this product differentiation will lead to any form of long-term competitive advantage.

Foolish takeaway

ASX listed infant formula companies do have an opportunity to grow sales and earnings as they expand overseas. However, I would not recommend investing due to shares prices which, in my opinion, do not accurately reflect the challenges these companies face from heavy competition.

Investing in Clover Corporation Limited (ASX: CLV) might be a worthwhile alternative investment if a sensible price becomes available. Part of Clover’s business is selling nutritional powders for use in infant formula. An investment would therefore offer exposure to this growing industry but from a slightly different perspective.

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Mitchell Perry has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Clover Limited. The Motley Fool Australia owns shares of A2 Milk. The Motley Fool Australia has recommended BUBS AUST FPO. 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 Scott Phillips.

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