Vegemite is just the beginning for Bega

Posted by AFN Staff Writers on 23rd January 2017

The big news that Bega has purchased Vegemite off Mondelez International does not reveal the full story about the acquisition.

The acquisition means a lot more than Vegemite now being owned by an Australian company again.

Alongside acquiring Vegemite, Bega has purchased many other supermarket brands that can be considered pantry staples for most Australians.

Apart from Vegemite, Bega acquired ZoOSH salad dressing, Bonox beef extract and many other products using the KRAFT brand such as peanut butter nut spreads, processed cheese slices, cheese spread, mayonnaise, parmesan cheese, Kraft Easy Mac and Kraft Mac & Cheese.

Bega also acquired Kraft’s huge Port Melbourne manufacturing facility and freehold spread across 6.5 hectares. The fact that this is prime real estate is likely to facilitate a potential sale and leaseback as part of the funding for the business brands acquisition.

The transaction potentially transforms Bega into a major new player that could dominate Australian food manufacturing.

The Kraft manufacturing operation at Port Melbourne, for many decades, was a hub for food processing innovation in Australia. However in the past 10 years, its overseas owners appeared to lose its Australian focus and failed to innovate in Australia or stop this failure of understanding from American management, inadvertently destroying the value of the Kraft and Mondelez brands in Australia.

However conversely, the opportunity has been seized by Bega, which will now be in a very strong position to gain considerably by diversification beyond the dairy segment and strengthen its balance sheet with stronger brand identification and huge opportunities to potentially become Australia’s most innovative food manufacturer.

The brands cost Bega a hefty AUD $460 million but it was a move seen worthwhile by many investors. When news of the brand purchases were announced last Thursday 19 January 2017, Bega’s shares surged to AUD$5.29. By the end of the week its shares had jumped by 21 per cent.

Although Bega has not detailed exactly how it will pay for its new brands, the company says it “has near-term corporate opportunities to pay down debt”.

More than 300, 000 jars of Vegemite are produced every day which is a phenomenal source of revenue.

The purchase by Bega comes off the back of a tough year for many dairy processors due to there being too much milk powder worldwide, leading to very low prices for producers. Companies relying on China’s demand for infant formula have had to look at solutions.

Bega has chosen diversification and strong consumer brands as a formula for future success and expansion.

Bega has projected that it expects the brands to generate pro-forma net revenues of approximately AUD $310 million and EBITDA of between AUD $40 to AUD $45 million in its first full year of operation.

Given this will be just the first year’s results and a fairly conservative projection at that, the purchase of Vegemite and its friends on supermarket shelves is certainly likely to provide a very good pay-off.

The fact that Bega becomes a partner for overseas partner Kraft will potentially give Bega the inside running on future revenue opportunities from other brands.

Bega’s position in the Australian dairy market will also be strengthened by its strong cash flows from its consumer goods brands. This augurs well for Bega to become more competitive in attracting steady and loyal milk suppliers who are looking for reliability and consistency in buying patterns. This may put pressure on one of its big rivals, Murray Goulburn.

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