Prabhat Dairy–Lactalis stake sale: Investors wary of deal transaction

Transaction routed through subsidiary - Sunfresh Agro industries

Investors worried on utilization of transaction proceeds

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Prabhat Dairy has struck a deal with French major Lactalis to sell its dairy business for Rs 1,700 crore, 1.1 times its FY18 sales. The deal value is significantly higher than Prabhat Dairy's enterprise value of Rs 1055 crore as of Monday's closing price. However, the premium moderates when one factors the capital gains tax (20 percent on capital gain). Also, compared with the prevailing trading multiples in the sector, the deal value looks inline.

In fact, the earlier transaction of Lactalis in 2014 when it bought Hyderabad-based Tirumala Milk Products (transaction value: Rs 1,750 crore) was at a higher multiple (EV/sales of 1.22).

Table: EV/Sales multiple in listed space

Deal transaction details

The Rs 1,700 crore transaction has two parts wherein Prabhat Dairy's shareholding in subsidiary Sunfresh Agro industries would be sold to Lactalis-owned Tirumala Milk Products for Rs 1,227 crore. Prabhat Dairy directly owns 29.9 percent in Sunfresh Agro industries, and the rest through its 100 percent subsidiary Cheese Land Agro.

The additional Rs 473 crore agreed in the deal would come from the slump sale of the dairy business to Sunfresh Agro industries. This includes specified tangible and intangible assets, contracts, rights, personnel and employees, data and records, inventory and other assets and liabilities as agreed by the parties in the deal.

The transaction constitutes 98.24 percent of the consolidated revenue of Prabhat Dairy and contributed Rs 1,529 crore in sales in FY18. Since the turnover of Sunfresh Agro industries was Rs 945 crore in FY18, implicit revenue from business sold in slump sale by Prabhat dairy to its subsidiary would be Rs 584 crore. The deal is expected to close by Q1 FY20.

Lactalis' foray into India

The French dairy major has been on an acquisition spree in India. In the recent past, there have been indications that signal consolidation in the dairy sector would continue.

Following the acquisition of Tirumala, Lactalis acquired the dairy business of Indore-based Anik Industries for Rs 470 crore. Now, Lactalis has a presence in Maharashtra, Madhya Pradesh, Andhra Pradesh and Karnataka.

Even as Lactalis has strengthened its share, rival Danone -- another French giant in the dairy space -- exited its business in India in 2018. However, the latter continues to keep tabs on the Indian market and has recently invested in Mumbai-based food startup Drums Food International.

Deal proceeds utilisation brings in uncertainty

Table: Prabhat Dairy - Shareholders

Source: BSE

Prabhat Dairy had been looking to sell stake for some time now. Until recently, Tata Global Beverages was interested in a buyout, but the board of Tats Sons did not approve the deal.

As far as the current transaction is concerned, it is routed through a subsidiary, so all proceeds (post capital gains tax) would come to the company and it needs to be seen how it will be shared with shareholders or utilised for any further strategic investment. Recent instances, such as Leel Electricals, wherein minority shareholders could not benefit from the M&A transaction proceeds is fresh in the minds of investors.

While promoters own majority stake, the remaining shareholding is mostly with institutions, trusts and funds. Retail investors constitute about 4.85 percent of the shareholding.

Going forward, Prabhat Dairy is expected to operate in its residual business of cattle feed and animal nutrition. With respect to animal nutrition, the company recently signed a deal with Denmark major DLG.

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