If Parmalat Buys Goodman Fielder's Dairy Division

On Saturday, Italian newspaper La Repubblica reported that Parmalat SpA is considering a bid for Goodman Fielder's New Zealand Dairy division in order to help prop up weakening margins in its Australian business. According to numbers from ABN Amro, Parmalat Australia's 4.0% EBITDA margin compares to Goodman Fielder's FY08 EBITDA Dairy margin of 9.1%.

The question is: would Goodman Fielder be willing to sell if a suitable bid emerged and for how much?

In the past, Goodman Fielder has confirmed its preference to maintain its ability to approach retailers from a greater position of strength by offering both a baking and dairy offering. This has meant maintaining its hold on New Zealand Dairy. But times are tough and cash is scarce and Fonterra is regularly upping the competition stakes in the dairy market.

On top of that, analysts at Citi think the business has underperformed since it was acquired in December 2005. Profitability has halved and a NZ$199m goodwill write-down has been necessary. The broker sees the dairy business as poorly placed strategically, principally because Fonterra acts as both its only supplier and only major competitor.

No wonder then broker response thus far has been unanimous in predicting that Goodman Fielder would be open to a bid at the right price. So, what's the right price?

UBS agrees with Citi about the underperformance issue. On top of making the same points as Citi, the broker also cites a halving of profits from FY06 to FY08, a tough industry structure that will see current regulatory protection over milk supply end over the next 4-5 years and the almost certain desire to shore up the balance sheet for capex and debt refinancing.

Goodman Fielder purchased New Zealand Dairy Foods from Rank Group in December 2005. The company paid about NZ$870m back in FY07, which all up implies a value to earnings ratio of about 8.5 times. ABN Amro thinks that this ration will be the key in any prospective sale, with it thinking that Goodman Fielder will be unlikely to settle for a multiple that isn't better.

The broker estimates the book value for the Dairy division is around $520m. This is comprised by the NZ$870m paid less an FY08 goodwill writedown of NZ$199m, plus the broker's estimation of the currency translation impact at around NZ$52m. Citi sees it as worth about $500m and while UBS doesn't set a price, the broker notes there would be potential earnings accretion from a divestment above $400m.

ABN thinks the company will be keen to ensure it remains are able to ensure the FY09 dividend is paid out of reported profit alone. The broker estimates the company could settle for a sale price A$40m below book value while still paying a 13.5cps dividend. On the broker's numbers, a sale price of $480m implies a value to earnings ratio of about of 10.7x on FY08 earnings of $45.1m. This would be pretty much bang in-line with other recent FMCG transaction multiples.

The FNArena database shows the stock is currently trading around, or just under the consensus target price of $1.57. The FNArena sentiment indicator is sitting at 0.6 on 4 Buys and 3 Holds.

At around 12.00 today, the share price was unchanged at $1.51, surrounded by a significantly weaker overall market.