After months of negotiations, French dairy group Sodiaal has reached an agreement to acquire struggling domestic rival Entremont Alliance.
The two firms signed a draft agreement in June 2010 but had struggled to reach a deal that would satisfy Entremonts shareholders and creditors. However, with the help of the French government, which oversaw the negotiations, these issues have now been resolved.
The move, which came into force on Jan. 1, 2011, creates a dairy giant with over 7,000 employees and sufficient scale to participate in the ongoing round of consolidation within the European dairy sector.
Entremont ran into difficulties after racking up significant debts to fund expansion. Its debts stood at over EUR 335mn in February 2010 and it made losses of EUR 34mn in 2008, when the cost of repaying its loans was compounded by a fall in global dairy prices and high domestic farmgate milk prices. The issue of how to deal with Entremont’s debt load has scuppered previous deals but it is likely that the latest deal means that creditors will wipe off part of the debt in exchange for bonds that could be converted into equity.
The move is the largest acquisition in the European dairy sector since 2008’s merger between
From this position the firm is likely to look to expand further, particularly if it was able to structure the deal so as not to have significantly increased its own leverage. BMI had previously suggested that if it failed to reach a deal it could itself become a takeover target, with revenues prior to the acquisition of EUR 2.2bn, meaning it is much smaller than major players in the sector and is in a weak position to resist an advance from giants such as
However, following the acquisition, the firm’s revenues will stand at over EUR 4bn and Sodiaal can instead focus on closing the gap with its larger rivals.
We expect this deal to be the first of many in the European dairy sector during 2011, with companies looking to consolidate before EU dairy quotas are scrapped in 2015. This a move that will make it easier for firms to produce more dairy products for export, for which large-scale is crucial, and will also enhance region-wide competition, meaning smaller firms are likely to get squeezed, pushing the industry to consolidate around a small number of international dairy majors.
