Milkiland acquires Polish cheese plant

Milkiland (MLK PW), one of Ukraine’s leading milk and cheese producers, acquired Polish cheese maker Ostrowia for PLN 49.3 mln (EUR 12 mln) using its own funds, the company reported yesterday. According to the source, Ostrowia has a hard cheese production capacity of 15 kt p.a. (37% of Milkiland’s pre-acquisition capacity), and is capable of making up to 7 kt of processed cheese and up to 11 kt of curd cheese and yogurts p.a. Milkiland noted that the target is currently in bankruptcy in Poland and needs EUR 4.5 mln in working capital financing this year (the target’s debt was not disclosed). In addition, Milkiland is planning to spend EUR 3.5 mln in CapEx to adjust Ostrowia’s facilities to CIS market requirements. Milkiland expects the acquired facility will add 15% to the company’s consolidated EBITDA in 2013-2014.

Alexander Paraschiy: The EUR 20 mln of investments in the Polish asset accounts for 11% of Milkiland’s current market-implied EV, which is less than the expected contribution of Ostrowia to Milkiland’s future cash flow (15%). However, as Milkiland has not disclosed Ostrowia’s debt burden, it is hard to estimate whether the deal is value accretive for minorities. The key benefits for Milkiland from the deal is geographical diversification (now in three countries: Ukraine, Poland and Russia) that allows to soothe main operating risks: raw milk price volatility (Ukraine) and cheese supply limitations (to Russia). All in, we believe the market will reward the deal.