Arla Foods’ board of representatives has approved the dairy group’s proposed mergers with the German Milch-Union Hocheifel and British Milk Link. The board of representatives voted in favour of the two mergers by a large majority as did the members of the MUH and Milk Link co-operatives.

Peder Tuborgh, chief executive of Arla Foods, comments: “This is an important decision and fundamentally strengthens Arla. The circle of ownership is being expanded with more owners and with owners in the UK, who all share our vision of the future – to be a strong European dairy company that operates in a global market.”

The two mergers will now be examined by the relevant regulatory authorities. Arla Foods expects to be able to carry out the mergers during the autumn of 2012.

Arla Foods is planning two mergers in the British and German marketswhich will immediately increase its revenue by DKr9 billion (Eur1.2 billion) per year and strengthen its position as one of Europe’s leading dairy groups.

Arla Foods is seeking to complete two major mergers – with Germany’s eighth largest dairy, the co-operative Milch-Union Hocheifel (MUH), which has owners in Germany, Belgium and Luxembourg, and with the UK’s fourth largest dairy, the co-operative Milk Link.

As a result of the mergers, Arla will have, for the first time, co-operative owners in the UK, and in Germany the group of owners will be significantly expanded.

The owner representatives in Arla Foods and MUH and the members of Milk Link will make a decision on whether to merge on June 26th and the mergers will require clearance from the regulatory authorities. If the mergers are finalised and approved, Arla will be represented by owners in its four largest markets, the UK, Sweden, Denmark andGermany, and also in Belgium and Luxembourg.

The planned mergers are in line with Arla’s Strategy 2015, the key objective of which is to improve returns for its owners by, among other things, enhancing their positions in the core markets of the UK and Germany.

“Both Milk Link and Milch-Union Hocheifel are strong, well run dairy groups, which, with their product portfolios and production systems, will strengthen our business in both countries,” says Peder Tuborgh, chief executive of Arla Foods. ”In each of the three companies, the aim is to create value for our farmer owners in the form of a strong milk price. This will also be the case going forward, and our ability to deliver good results will be strengthened if these plans are realised.”

The mergers will bring Arla a significant step closer to a number of the main objectives in the group’s Strategy 2015: Arla will be the UK’s largest dairy company and will rank third in Germany; these are both stipulated objectives for Arla by 2015.

Another Arla objective is to achieve a revenue of DKr75 billion by 2015. The two companies, which will become an integral part of Arla Foods if the mergers take place, have combined revenues of approximately DKr9 billion. In 2011, Arla’s revenue amounted to DKr55 billion. Together, the companies are expected to generate revenues of DKr70 billion by 2013.

Worldwide beer consumption has increased by over 3% per annum during the last ten years and the top ten brewers now account for over 60% of global beer volume, compared to 38% in 2000. A new report by Rabobank titled ‘Value creation in the Beer Sector through M&A activities’ looks at changes in the beer sector in the last decade. Following consolidation, four leading global brewers have emerged. These four beer companies – AB InBev, SABMiller, Heineken and Carlsberg – have tripled their combined market share since 2000 and have almost quadrupled their volumes.

Most of the rise in worldwide beer consumption has come from rapid growth in Asia, Eastern Europe, South America and Africa, while volume growth in developed markets was negligible. “The major brewers reacted to these changes by entering emerging markets and consolidating in developed markets. This has radically altered the competitive landscape,” says Francois Sonneville, a food & agribusiness analyst at Rabobank. “The most striking change is the emergence of a top-four.”

Do Acquisitions Add Value?

According to Francois Sonneville the strategies of the top-four are similar. By making acquisitions they seek to grow their volumes to benefit from economies of scale. “The advantages of scale have led to improved profitability and the margin development of the top-four has been better than the rest of the market,” he says.

But many brewers outside the top-four are not convinced that acquisitions can add value at today’s prices. Francois Sonneville explains: “Over time, acquisitions have become more expensive. So brewers find it difficult to decide the best course to add value to their business in an increasingly aggressive environment.” Ignoring the developments however is not an option. As the chief executive of one market leader says in the Rabobank report: “You’re either at the table or on the menu.”

The Rabobank analyst acknowledges that the traditional method of comparing the return on capital employed (ROCE) to the weighted average cost of capital (WACC) is ideal for predicting value creation, but difficult to use for evaluation purposes. Therefore, a second method, devised specifically for this report, compares the top-four with a constructed peer group of 20 listed major brewers.

The conclusion is that there is no justification for brewers to disregard acquisitions in general for fear of destroying value. A comparison of developments in return on capital employed shows that the acquisition strategy of the top-four brewers not only improved margins, but also led ultimately to value creation. Francois Sonneville continues: “Despite initial pressure on the ROCE from M&A activity, the top-four have managed to outperform the peer group in the long run. So these four have found it better to be at the table than on the menu.”