Dairy Crest sells St Hubert

Dairy Crest has increased its exposure to Britain’s liquid milk sector by selling its highly profitable St Hubert spreads business.

The sale to Montagu Private Equity for €430m (£347m) represents a £90m return on investment for the supplier of about a third of UK supermarket milk.

The deal comes four months after Dairy Crest unveiled a surprise “strategic review” which put St Hubert on the block. It underlines the company’s inability to expand its French business in spite of lifting St Hubert’s own sales and profits.

On a continuing basis, the company will have estimated pre-tax profits of £50.5m on sales of about £1.5bn. Mark Allen, Dairy Crest’s chief executive, denied it raised questions over the company’s independence. “I think the future is good,” he said. “The decision to sell St Hubert was based on developing our UK business, where we have a foods business that in brand terms performed as well as St Hubert.” Sales of Cathedral City cheese have doubled over five years, he added.

Nonetheless, consolidation and thin margins in liquid milk prompted speculation that Dairy Crest may follow fellow dairy producer Robert Wiseman, which was acquired by Muller of Germany this year.

“As Muller’s takeout of Robert Wiseman showed, even liquid milk assets have a price,” wrote Eamonn Ferry, analyst at Exane BNP Paribas in a note to clients.

“As Dairy Crest also has healthy leading brands in cheese and spreads, we see a good probability of a takeout on a multiyear view.”

Mr Allen said proceeds from the St Hubert disposal would sit on the books for a while and appreciate the value of being a debt-free company. “We are going to be cautious, not rush out and buy anything or return cash to shareholders,” he said.

Ultimately, however, the plan is to add to the UK business, effectively drawing a line under international expansion as it had initially hoped to do using St Hubert as a beachhead. Exports, which are small scale, will however continue.

Analysts mostly applauded the sale. The €430m price tag implies a multiple of enterprise value/historic earnings before interest, tax, depreciation and amortisation of 8.3 times on Panmure Gordon’s estimates. The brokerage upgraded its recommendation from hold to buy.

“If you put Dairy Crest’s branded business on that multiple you would have a much higher share price,” said Damian McNeela, analyst at Panmure Gordon. Instead, on his numbers, Dairy Crest’s continuing businesses trade on an EV/this year’s ebitda multiple of 4.8 times compared with the sector’s 6.3 times.

However there was also some cheerier news for dairy processors on Friday, with Robert Wiseman dropping the amount it pays farmers by 1.7p a litre, from around 26p.

Other processors are expected to follow suit – Dairy Crest is now in negotiations – and Mr McNeela reckons this will help shore up margins rather than being immediately grabbed by the retailers.