Dairy Crest Sells Liquid Division

Dairy Crest has agreed to sell its liquid milk division to Muller for £80m.  This will see DC shrinking by over half in terms of milk processed and turnover, and it will leave it focused on its cheese and spreads business, including Cathedral City, Country Life and Clover.

The ‘Dairies’ operation of DC has struggled in recent years.  It supplies liquid milk to the major retailers, the ‘middle ground’ market and also households through its doorstep delivery service – Milk&More.  However, in the year to 31^st March 2014 it only made £0.6m profits on revenue of £645m.  Losses had been recorded in earlier years, but the company had undertaken a process of rationalisation, closing dairies and depots.  By contrast, revenue for the year to 31st March in its Products division was £442m and generated £56.1m of profit. 

The Stock Exchange saw this as a positive move, with Dairy Crest shares up between 10-20% on the announcement.  Presumably the commercial logic for Muller is to combine the DC business with its Wiseman operation and generate costs savings and economies of scale.  It appears that, with a price of £80m for a business with an annual turnover of £645m, Muller is not over-paying.  The combined entity would also have considerable market share, which may give it greater pricing power.  For that reason, the deal will have to be approved by the competition authorities.  Only Muller and Arla would remain as major liquid processors. 

Muller will take on the plants at Foston, Chadwell Heath and Severnside, as well as 1.3 billion litres of milk supply.  DC would be left with the Davidstow, Nuneaton, Frome, Kirkby and Erith sites.  The deal may take some time to complete.  However, it could herald a further round of rationalisation of the UK dairy sector.  A smaller (and more profitable) DC may prove a tempting takeover target, or it may wish to go on the acquisition trail itself.  The future of First Milk also continues to rumble away in the background.