Coles share price climbs following $100 million acquisition

Coles is making a major acquisition to boost its dairy operations.

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Key points

  • Coles has announced an agreement to acquire two dairy processing facilities
  • The supermarket giant is buying them from Saputo for $105 million
  • Management expects the acquisition to exceed investment return hurdles within three years

The Coles Group Ltd (ASX: COL) share price is on the move on Monday.

In morning trade, the supermarket giant's shares are up 0.65% to $18.14.

Why is the Coles share price rising?

As well as getting a boost from improving investor sentiment, the Coles share price is rising today after it made an acquisition announcement.

According to the release, Coles has entered into a binding agreement to acquire two automated milk processing facilities from Saputo Dairy Australia (SDA) for approximately $105 million.

These processing facilities are located in Laverton North (VIC) and Erskine Park (NSW) close to Coles' distribution centres. They each have the capacity to process around 225 million litres a year and are predominantly used to process Coles Own Brand 2L and 3L milk.

Why acquire these facilities?

Coles' CEO, Steven Cain, believes that bringing these facilities in-house will protect its milk supply, complement existing investments, and open up growth opportunities. He commented:

These facilities are state-of-the-art, delivering exceptional production efficiency and quality through highly automated processes. Whilst improving security of our milk supply and our supply chain resilience in the dairy sector, these facilities also have sufficient capacity to facilitate further growth opportunities through new product innovation.

The acquisition will build on the strong relationships we have developed with our dairy farmers since launching our direct sourcing model in 2019. Around 90 dairy farmers supply milk direct to Coles, allowing these farmers to invest for the future and ensuring the long-term sustainability of their farms. These processing facilities will complement our existing investments in our Own and Exclusive brand portfolio and manufacturing capabilities in areas such as convenience meals and meat.

The acquisition will be funded from Coles' existing debt facilities. Pleasingly, management expects the deal to exceed its investment return hurdles within three years.

Though, the acquisition of these sites remains subject to Australian Competition and Consumer Commission (ACCC) approval and other customary closing conditions. If all goes to plan, it is expected to be completed in first half of FY 2024.

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 positions in and has recommended Coles Group. 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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