Bega Cheese is selling its relatively new Derrimut infant formula canning plant in Melbourne and one of its spray milk powder dryers to long-time nutritional formula customer, Mead Johnson.
The $200 million deal strategically bolsters the company’s balance sheet as Bega finalises its $460 million deal to buy Mondelez’s Australian grocery business, including spreads such as Vegemite.
The sale of the nutritional formula finishing plant and the spray dryer at Tatura in northern Victoria has been accompanied by a 10-year service agreement with Mead Johnson, ensuring Bega will have access to product from the sites to supply its own customers.
Last week Bega announced a $15.7 million profit after tax for the first half of the 2016-17 year, up 8.2 per cent, with revenue up 10.6 per cent to $621 million.
The result was achieved despite challenging global dairy markets, particularly in the competitive cheddar cheese cut and pack and processed cheese sectors.
It also made a $7.1 million pre-tax inventory impairment for nutrition powder product stock held by the Bemore partnership – Bega’s underperforming new joint venture company with vitamin business, Blackmores.
The Derrimut plant was commissioned in 2015 to take advantage of Bega’s booming sales of nutritional powder to an expanding customer base.
It had previously been making infant formula on contract to the US pediatric nutrition company Mead Johnson, and other customers, for more than a decade.
This week’s deal was foreshadowed in January to help offset the cost of Bega’s purchase of the Kraft spread, salad dressing and cheese brands from Mondelez.
Both deals are expected to be completed by the end of June.
“We are delighted to strengthen our relationship with one of our long-term customers,” said Bega Cheese executive chairman Barry Irvin.
“The sale of our dryer and finishing plant together with the ongoing relationship with Mead Johnson is strategically and financially important for Bega Cheese.
“It secures revenue streams from these assets and releases capital to fund our recent Mondelez purchase.”
Chief executive officer, Paul van Heerwaarden, said Bega was proud Mead Johnson had recognised the quality of the farmer-owned company’s assets and its reputation for producing premium infant nutrition products.
“We’re excited to continue to work with them over the next 10 years,” he said.
The 110-year-old Mead Johnson company develops, makes and markets more than 70 products in more than 50 markets worldwide.
Although global dairy prices have improved dramatically of late, Mr Irvin warned last week the company still faced more challenging profit margin pressures, particularly as the volatile infant formula market’s results flowed through to the balance sheet.
However he believed full-year earnings would remain in line with last year.
"We always remain alert to changes in the market and supply and demand dynamics, endeavouring to position ourselves to be agile enough to meet challenges and respond to opportunities," said CEO Mr van Heerwaarden.
"While the nutritionals segment is experiencing challenges this year, the ingredients market is improving rapidly."
Bega has also taken on extra milk suppliers in northern Victoria after the past year’s wet winter and dramatic farmgate price reductions cut production as much as 20pc on some farms, increasing uncertainty about supplies.
Bega was named the best performing company listed on the Australian Securities Exchange’s top 200 Index in January after the sharemarket responded strongly to is move to buy the Kraft brands.
While its share price is still down on year ago levels of $7-plus, partly because of Benmore’s lacklustre results, Bega has been rising since December and was trading around $5.75 early this week.