The A2 Milk Company Ltd (ASX: A2M) share price will be one to watch on Thursday after the release of an announcement.
What did a2 Milk announce?
This morning a2 Milk confirmed that it has entered into a binding agreement relating to the acquisition of a 75% interest in Mataura Valley Milk (MVM).
MVM is a dairy nutrition business that is located in Southland, New Zealand. Management notes that the proposed acquisition will provide the company with the opportunity to participate in nutritional products manufacturing. It also provides supplier and geographic diversification and strengthens its relationship with key partners in China.
According to the release, the company will be paying a total consideration of NZ$268.5 million for the 75% stake in MVM. This is based on an enterprise value of circa NZ$385 million.
The acquisition will be undertaken on a debt-free cash-free basis and funded from the company's existing and rather substantial cash reserves. At the end of FY 2020, a2 Milk had a cash balance of over NZ$850 million.
What now?
The completion of the proposed transaction is subject to approval from the New Zealand Overseas Investment Office. Management expects completion to occur on 31 May 2021.
A key feature of the company's proposed investment in MVM is that MVM's current majority shareholder, China Animal Husbandry Group (CAHG), will retain a 25% interest alongside it.
CAHG is a wholly owned subsidiary of China National Agriculture Development Group, which itself is the the parent company of a2 Milk's strategic logistics and distribution partner in China, CSFA Holdings Shanghai (China State Farm).
Why MVM?
The company revealed that the due diligence process has confirmed its strategic rationale for pursuing this acquisition.
Management notes that this includes the establishment of dual supply arrangements for nutritional products to complement its existing supply relationships. It will also help capture a unique opportunity to acquire a recently constructed and operational, world-class nutritional products manufacturing facility in New Zealand.
Another reason is that MVM is well located for access to a growing productive milk pool, supported by favourable climatic conditions and water availability. It also notes that it will be partnering with a highly respected China state owned enterprise in CAHG, to assist in further developing the business, including into China.
Finally, the acquisition gives it the opportunity to produce additional infant nutrition products for China and other markets and the ability to capture manufacturing margin.
A2 Milk's Chief Executive Officer, Geoff Babidge, commented: "MVM provides a unique opportunity to acquire a new world-class nutritional products manufacturing capability in New Zealand, alongside a highly respected China state owned enterprise in China Animal Husbandry Group. We have worked closely with CAHG and MVM over recent months and have developed relationships with both teams that we are confident will provide a strong foundation for the business going forward. We continue to be impressed by the MVM facility and the management team."
