Lion Dairy & Drinks managing director Peter West says the struggling division will use the $138 million from the sale of its everyday cheese business to invest in fast-growing brands as it strives to improve returns.
Dairy group Warrnambool Cheese & Butter (WCB) on Monday agreed to buy the business, which cuts, wraps and distributes cheeses under the Coon, Cracker Barrel, and Mil Lel brands.
Lion, a subsidiary of Japan’s Kirin, owns 10.22 per cent of WCB. Lion has been using its stake as a bargaining tool in negotiations with WCB’s controlling shareholder, Canadian dairy giant Saputo. Mr West said Kirin was supportive of his turnaround strategy and the sale is not a precursor to exit from dairy in Australia.
“We are tracking really well and are ahead of expectations on our deliverables … we’ve given Kirin really good confidence in the business. No other reviews [of assets] are taking place,” he said.
Lion’s everyday cheese business has annual sales of about $160 million and employs 170 people.
WCB has indicated to Lion it will continue to run the plant and retain all of the employees.
WCB supplies the cheese to the Lion business and its factory is next door to the cut and wrap operation. Lion has written billions off its assets and has been generating dismal returns, particularly in its dairy division.
The everyday cheese business is high-volume and low-margin, and given the competition on the retail shelf, Lion did not want to be left in an uncertain negotiating position with its key supplier.
Mr West said the everyday cheese category is growing at between 1.5 per cent and 2 per cent annually.
“We just felt we were better off investing in other categories with higher growth,” he said.
“In convenience stores, over summer for the first time, sales of Dare [iced coffee] passed sales of Coca-Cola.”
Since October, sales of Lion’s Dare iced coffee and Farmers Union greek yoghurt have grown at annualised rates of about 15 per cent.
Montreal-based Saputo took ownership of 87.92 per cent of WCB’s shares last year after a long takeover battle with Australian dairy players Murray Goulburn and Bega Cheese.
Mr West said no discussions had yet taken place about the sale of Lion’s WCB stake to Saputo. Lion’s 10.22 per cent stake is preventing Saputo from delisting the company from the ASX.
“That’s a decision that will play out over time. There has been no decision on the stake,” he said.
The $137.5 million acquisition price is on a debt-free and cash-free basis, and is subject to final adjustments including inventory at closing.
The deal is expected to be complete in May.
Lion was advised on the transaction by Greenhill and King & Wood Mallesons.
Source: Sydney Morning Herald