The guts of the business is to take milk from Australia and New Zealand farms, turn it into cheese and butter, and sell it regionally. Is that tasty enough in volatile markets?
Western Star butter and Bega cheese maker Mainland Group is the closest thing investors have seen to a privatisation in 11 years.
It’s big – about $4.5 billion revenue – makes most of its sales in Australia and New Zealand, is growing in Asia and management is tired of competing for both capital and attention inside a bigger group while telling investors there is plenty of margin upside.
It’s not a privatisation – but not that far off. Mainland Group is owned by New Zealand dairy giant Fonterra, a co-operative of farmers and now non-farmer shareholders, which has complied a bunch of its consumer brands to be spun-off to a new owner.
Mainland Group’s pitch sounds like a privatisation: imagine where this business could go and what its earnings could be under management team, capital stack and ownership structure solely focused on its milk, cheese, butter and other dairy products. Fonterra, like it or not, is pegging its future on ingredients (raw materials like milk) and foodservice (selling to restaurants) to “create a more focused and higher-performing co-op”.
So Mainland, a consumer brands business that takes milk and turns it into dairy products sold in supermarkets, is now on the sale block.
Mainland chief executive René Dedoncker, the son of a Belgian chef and an Australian farming family member, was delivering this quasi-privatisation pitch to equities fund managers in Sydney on Tuesday and will do the same in Melbourne on Wednesday.
His bosses want to get an IPO bid for Mainland – a priced listing underwritten by investment banks and/or institutional investors – to compare to trade and private equity bids.
Mainland buys 1.4 billion litres of milk a year from farmers in Victoria and Tasmania. Nicolas Walker
Fonterra has said it will sell to the highest bidder; its publicly stated goal is “maximising long-term value for farmer shareholders, including the best return on capital invested”.
If Mainland is to be listed, it is up to Dedoncker to convince listed markets to outbid the other contenders. The private equity/trade auction is already under way and it is always hard for IPO markets to beat a motivated trade bidder (given the lack of potential synergies).
Convincing equities investors that this is almost a privatisation is perhaps his best chance. Australian fund managers have done well out of privatisations for decades – Commonwealth Bank, CSL, Medibank Private – benefiting from tighter management, capital discipline and costs that can come from a public listing.
‘Farmers ask harder questions than investors’
Mainland is a corporate carve-out – the same underlying themes apply as a privatisation, albeit it is about spinning a business out of a larger parent company rather than the government.
Can Dedoncker, who speaks passionately about dealing with farmers and customers and has had a long career at Fonterra, pull it off?
“Farmers ask harder questions than investors,” he says. “They’re pretty straight-up, they’re doing it to feed their family.”
It helps that he fronts investors with a business and bunch of brands that are easy to digest.
The guts of his business is taking milk from Fonterra in New Zealand (a perpetual supply contract is 99 per cent finalised, he says) and Australia (which comes from farms in Victoria and Tasmania and accounts for 46 per cent of total supply) and making milk powder, cheese, butter, cream and liquid milk in its 15 factories. It bought 1.4 billion litres of milk from Australian farmers last year, which is about 5 per cent more than ASX-listed Bega used to make its flavoured milk and yoghurts.
Mainland’s Australian brands include household Western Star butter and Bega, Mainland and Perfect Italiano cheese.
“If Dedoncker is going to pull off the listing, he will also need a bit of luck.”
In New Zealand, it has more than 50 per cent market share in milk (Anchor Blue) and other dairy categories, while Dedoncker says it has 80 per cent plus market share in Sri Lanka selling milk powder under the Anchor brand. Nearly 60 per cent of gross profit comes from sales in Australia and New Zealand.
If you add them all up, Mainland’s various pieces had $NZ4.9 billion ($4.5 billion) net revenue in FY24 and $NZ200 million EBIT at a 4 per cent margin, according to the presentation given to fund managers.
Four per cent sounds like a lot of work and moving pieces for reasonably skinny return – and hardly screams massive earnings multiple.
Dedoncker says that margin number is a guide from last year based on a bunch of different businesses coming together and in “no way, no way” represents what Mainland would expect to earn if it does go to the ASX-boards as a separately listed company.
Investors will have to wait for the prospectus to get a better guide.
Mainland’s presentation does split out gross profit for its regions that are more healthy, particularly in its smaller Asian markets. The sizzle is the potential for more growth in Asia, where dairy consumption is less prevalent than Australia or New Zealand and Mainland has a foot in the door.
Mainland’s gross profit composition by sub-category* (%)
It made $498 million gross profit at a 14 per cent margin in its biggest market, Oceania, last year, $203 million at 36 per cent in South-East Asia, $106 million at 22 per cent in Sri Lanka and $41 million at 17 per cent in the Middle East and Africa. Revenue was up 8 per cent a year in the past three financial years.
Some analysts were surprised Mainland excluded Fonterra’s China consumer operations and its Dammam plant in Saudi Arabia, while Forsyth Barr’s Matt Montgomerie said its most recent large sale (Soprole) was struck at nine times EBITDA.
Australian investors will compare Mainland to Bega, which is already listed on the ASX and trades at 29-times forecast earnings per share and 10 times expected EBITDA.
Bega has a similar-sized Australian business, however nowhere near the scale in other markets and is growing revenue and earnings more slowly. It recorded a 6.2 per cent EBITDA margin in FY24.
If Dedoncker is going to pull off the listing, he will also need a bit of luck.
We’ve had only one company raise more than $1 billion to list in the past three years, and recent equity market volatility threatens to thwart investors’ risk appetite and propensity to take a punt on a new stock like Mainland.
However, that dearth of listings combined with the continued hollowing out of the ASX’s mid-cap ranks via buyouts, does have fund managers looking for new ideas. Mainland is one. Whether it’s attractive compared to what else is out there will come down to the price.
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