What's beneath the lid as Müller corners Wiseman?

Say what you will about the Germans, they’re not half bad at springing surprises on you. And the one unveiled by Müller Group this week takes some beating.

The yoghurt manufacturer entered a £280m bid to buy Robert Wiseman Dairies on Monday - and the dairy industry has been trying to make sense of the deal ever since.

It is not that M&A in UK dairy processing was unexpected the received wisdom has long been that further consolidation in the sector was inevitable. Nor is it difficult to see why Wiseman may have been tempted to sell - with margins increasingly under pressure from supermarket milk price wars, its shares had lost more than half their value since 2010. Getting 390p a share - a 60% premium over its share price prior to Müller’s bid last week - was always going to look like a good deal.

But just what is a branded yoghurt manufacturer going to do with the UK’s largest liquid milk processor?

Müller itself is offering few clues. Its official offer to Wiseman shareholders talks of two “highly complementary” family businesses coming together to form a “leading dairy player” and the chance to enter new market segments. “The acquisition of Wiseman is very much in line with the group strategy to acquire profitable companies in markets where Müller has already been a successful player,” it adds in a statement to The Grocer.

But given Wiseman is focused on liquid milk and Müller’s current UK business is yoghurts and desserts, industry experts struggle to see how Müller and Wiseman could be described as “highly complementary” or what synergies are likely to be created.

Take bargaining power with the retailers. Müller has well-established relationships with the German discounters - it produces own label for Aldi and Lidl in Germany through a dedicated subsidiary, TMA, and could use its existing links to help boost Wiseman’s business with the discounters in the UK. But that alone is nowhere near enough to justify this deal.

And synergies might be less forthcoming with the major mults. The UK liquid milk market is notoriously competitive, and retailers are bound to try to turn ownership changes at Wiseman to their advantage, warns one processor source. “I’m sure they’re rubbing their hands,” he says. “There are three liquid milk processors at the moment and there will still be three after this deal instead of the market consolidating around two processors - that’s great news for the retailers.”

Then there’s branding. Müller has plenty of expertise in building up successful consumer brands and already sells branded liquid milk in its German home market through its Sachsenmilch subsidiary, among others. The company says it plans to keep Wiseman’s “distinctive brands” including Black and White, but opportunities to build up further brands in the UK’s own-label-dominated liquid milk market could be limited.

Fat question mark
What about operational efficiencies? True, there are likely to be some efficiency gains from, for example, central milk procurement, and Müller says it hopes Wiseman’s strong distribution network will boost its Culina chilled logistics business. But Wiseman is seen as highly efficient and lean already, leaving little scope for its new owner to make easy efficiency gains. “Müller has bought what is probably the leanest, most efficiently run processor in the UK,” says one producer source.

In addition, combining two short-life, low-fat businesses such as yoghurt and liquid milk - which both produce a lot of excess fat that then needs to be sold on - is an unorthodox way to look for logistical efficiencies, says one senior industry source. “The classic model is you balance a short-life, fresh milk product with a longer-life product such as cheese or butter.”

This is echoed by another executive. “The biggest issue is what they are going to do with the fat,” he says. “There are absolutely no synergies on fat in this deal it’s simply going to produce even more excess fat.”

If the combination does not offer an immediately compelling deal rationale, the answer, some believe, could be found further afield - in wider designs on the UK dairy industry.

“The ultimate goal must be to go beyond Wiseman and look for further consolidation,” says one source. “If you think about Wiseman being step one and then, perhaps, Dairy Crest is step two, it all starts to make sense - you get efficiency gains across two liquid operations, and you’d get Dairy Crest’s cheese and spreads business to take up the fat. That could be a highly attractive business.”

Dairy Crest is already tipped by analysts to be the next big takeover target in the dairy industry (see p38), but a combination of Wiseman and Dairy Crest’s liquid businesses might prove difficult to get past competition regulators.

Others believe Müller could - initially at least - be chasing less ambitious dreams with Wiseman. “It’ll look at the adjacent categories, like long-life and medium-life milk, and build up a business on the side, but it could just be about making a good financial investment - Wiseman seems in line to generate about £25m of profits this year, so it’ll see it as a 10-year payback,” says one source. And the City analyst agrees that even if commercial synergies aren’t obvious, the deal makes sense in financial terms as “Müller has got into Wiseman at a cyclical low point”.

Müller and its owners certainly seem to have their heart set on making a success of the UK. A source familiar with the Müller company ethos and owner Theo Müller adds: “I think he’s decided he’s going to find it very difficult to grow the Müller business in the UK in its current guise.

“But he loves the UK and he’s loves coming to the UK - it’s his biggest pleasure. Whilst he’s a tough businessman, he’s very, very pro-UK.”

If, as expected, Müller’s bid for Wiseman goes through next month, Müller and his team will have plenty more opportunities to demonstrate their love for all things UK dairy in coming months and years.