Vegemite back in Aussie hands

Many kiwis resorted to Vegemite in the great Marmite shortage of 2012. Photo / File
Many kiwis resorted to Vegemite in the great Marmite shortage of 2012. Photo / File

Cheese and Vegemite is a popular if somewhat disgusting sandwich filling for Australian lunch boxes.

Dairy company Bega is hoping that coagulated milk protein and the salty yeast extract will also go together in a corporate sense after spending A$460 million ($485m) to acquire the brand.

It's the first step by Bega in diversifying away from pure dairy and to becoming a major consumer goods brand.

The company argues that the acquisition will be good news for the dairy farmers who supply it milk, because they will be supplying a more stable company.

For its A$460m, Bega will receive not only Vegemite but a host of other brands owned by US food giant Mondelez International, including Kraft branded peanut butter and cheese slices, as well as a 6 hectare manufacturing site at 1 Vegemite Way in Port Melbourne.

Investors quickly warmed to the deal, with the Bega share prices shooting up by more than 15 per cent when it was announced.

The rise comes after Bega shares slipped by 40 per cent in the two months from the end of October to the end of December when investors grew worried about its exposure to the Chinese market. They were particularly concerned after Bega's partnership to sell infant formula and nutritional powder with vitamin maker Blackmores failed to meet sales forecasts.

Australians have seen many of our favourite brands be bought by multinationals in recent years, including Arnott's biscuits, Forster's beer and Aeroplane Jelly.

Vegemite is the first significant local brand to be bought back by an Australian company in decades. It was developed as a way of using a yeasts by-product from brewing in 1923, but the recipe was sold to Kraft only a few years later.

Vegemite isn't a growth product as it's something only Australians and New Zealanders want to eat. When he described the salty paste as "horrible" a few years ago, former US President Barack Obama pretty much summed up the global consensus on the product.

Nonetheless, the deal should work well for Bega.

Vegemite and the other products will add around A$310m to Bega's existing annual sales, which hit A$1.2 billion last year and will produce annual operating earnings of A$40m to A$45m.

Importantly, those profits will come regardless of what's happening with global diary prices, and as we've seen in the past year, dairy prices are as volatile as any other commodity.

Bega looks as if it will fund the purchase by selling new shares to investors. This capital raising should be well supported as the share market reaction to the deal demonstrates.

However, there will be a section of the investment community for whom Bega is now a less attractive investment. Those investors seeking exposure to a pure play stock with exposure to the Chinese consumer will now have to look elsewhere.

Wesfarmers Consolidates

As Bega diversifies, it looks as if retail and mining conglomerate Wesfarmers will consolidate its retail position.

The owner of Coles supermarkets, the Target and K-mark general retailers, Bunnings hardware and Officeworks is planning to sell its coal mining interests. It has put its Curragh coking coal mine in Queensland's Bowen Basin and its 40 per cent stake in the Bengalla thermal coal mine in the NSW Hunter Valley on the market.

There is also speculation that Wesfarmers may also sell its chemicals and fertiliser assets, which would further increase its concentration on retail.

Ironically, Wesfarmers looks to be selling just after it upgraded its first-half profit guidance following a surge in coal production and prices to the highest levels since 2011.

The pick-up in resources earnings underscores the benefits of Wesfarmers' conglomerate structure, but the company has questioned whether it would be better off without coal given growing opposition from consumers.

The long-term viability of coal assets should also be questioned, given that both China and India are moving towards self-sufficiency in coal, eventually depriving Australia of its key coal export markets.

Wesfarmers now expects resources to earn between A$135 million and A$140 million before interest and tax for the six months to December, compared with previous guidance of a broadly breakeven result, the company said.

Coal prices have slumped since hitting a recent high in November, so Wesfarmers won't get as much as it might have hoped for the mines, but now is as good a time as any to be selling.

The improved coal earnings come as Wesfarmers' retail operations come under pressure, particularly the Coles supermarkets.

Coles has outperformed rival Woolworths for the past seven or eight years, but Woolworths turnaround strategy of providing lower priced goods is starting to pay off. An analysis by investment bank UBS suggests Woolworths "won" Christmas.

Wesfarmers management look as if they'll have to put a lot of focus on retail this year.

- NZ Herald

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