a2 Milk share price on watch after announcing Mataura Valley Milk acquisition plans

The a2 Milk Company Ltd (ASX: A2M) share price will be on watch on Friday after a major announcement.

What did a2 Milk Company announce?

Earlier this week when a2 Milk Company released its full year results, it revealed that it finished the period with a cash balance of NZ$854.2 million.

It also advised that it would assess complementary merger and acquisition opportunities to drive further growth within its core markets.

Well, it certainly didn’t take long for the company to put these funds to work. This morning a2 Milk Company has announced that it is in discussions to make a major acquisition.

What is a2 Milk acquiring?

According to the release, the company is engaged in discussions with Mataura Valley Milk (MVM), a New Zealand dairy nutrition business, to explore options for it to participate in manufacturing at MVM’s facility in Southland, New Zealand.

As part of these discussions, the company has made a non-binding indicative offer to acquire a 75.1% interest in MVM for a total consideration of approximately NZ$270 million. This is based on an enterprise value of ~ NZ$385 million.

Management advised that MVM has agreed to provide the company with a period of exclusivity to conduct confirmatory due diligence and negotiate definitive transaction documentation.

This exclusivity arrangement is supported by MVM’s current majority shareholder, China Animal Husbandry Group (CAHG), which would retain a 24.9% interest in MVM alongside a2 Milk Company.

CAHG is a wholly owned subsidiary of China National Agriculture Development Group, which is also the parent company of a2 Milk Company’s strategic partner in China, China State Farm.

An acquisition aligned with its strategic objectives.

The company’s current Chief Executive Officer, Geoff Babidge, believes the potential acquisition would align with its strategic objectives.

He said: “As previously announced, due to the increasing scale of our infant nutrition business, we have been assessing participation in manufacturing capacity and capability. The potential investment in Mataura Valley Milk’s recently commissioned facility, alongside China Animal Husbandry Group, aligns with this strategic objective as we look to complement and build upon our current strategic relationships with Synlait Milk and Fonterra Co-operative Group, which remain in place.”

“Our intention would be to invest further to establish blending and canning capacity at Mataura’s facility to support the establishment of a fully integrated manufacturing plant for infant nutrition,” he added.

Though, the company warned that discussions with MVM are ongoing and remain incomplete. In addition, any potential transaction is subject to further due diligence, negotiation of definitive agreements, and requisite regulatory and third-party approvals. If a deal is made, it isn’t likely to complete until the end of FY 2021.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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