A2 Milk (ASX:A2M) share price on watch after acquisition update

This infant formula company is close to completing an acquisition…

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The A2 Milk Company Ltd (ASX: A2M) share price will be on watch on the ASX 200 on Monday.

This follows the release of an announcement relating to a major acquisition.

What did a2 Milk announce?

This morning a2 Milk announced that the New Zealand Overseas Investment Office has issued its consent to the company’s proposed acquisition of a 75% interest in Mataura Valley Milk.

As a result of this development, completion of the transaction is now to set to occur with effect from the end of July.

Current majority shareholder, China Animal Husbandry Group (CAHG), will retain a 25% interest in Mataura Valley Milk. CAHG is a wholly owned subsidiary of China National Agriculture Development Group, which is also the parent company of a2 Milk’s strategic logistics and distribution partner in China.

What is Mataura Valley Milk?

Mataura Valley Milk is a dairy nutrition business located in Southland, New Zealand.

Management expects the acquisition to provide the opportunity for a2 Milk to participate in nutritional products manufacturing, provides supplier and geographic diversification, and strengthens its relationship with key partners in China.

It also notes that it is an opportunity to acquire a recently constructed and operational, world-class nutritional products manufacturing facility in New Zealand and the ability to capture manufacturing margin.

Last year the two parties agreed a total consideration of NZ$268.5 million for the 75% interest, based on an enterprise value of ~NZ$385 million. The acquisition will be undertaken on a debt-free cash-free basis and funded from existing cash reserves.

At the time, then-CEO, Geoff Babidge, commented: “As previously announced, due to the increasing scale of our infant nutrition business, we have been assessing participation in manufacturing capacity and capability.”

“The potential investment in Mataura Valley Milk’s recently commissioned facility, alongside China Animal Husbandry Group, aligns with this strategic objective as we look to complement and build upon our current strategic relationships with Synlait Milk and Fonterra Co-operative Group, which remain in place. Our intention would be to invest further to establish blending and canning capacity at Mataura’s facility to support the establishment of a fully integrated manufacturing plant for infant nutrition,” he added.

The a2 Milk share price is down 44% since the start of the year. Shareholders will no doubt be hoping this acquisition is the catalyst to getting its shares heading in the right direction again.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended A2 Milk. 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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