25 February 2000

Industry reaction mixed over Dairy Crests plans

By Robert Harris

DAIRY Crests recent announcement that it is to buy Unigates dairy business has raised fears that farm-gate milk prices will come under more pressure.

But some in the industry believe farmers will benefit from efficiencies within the dairy sector.

The merger should be completed by May 2000, subject to shareholder approval, making Dairy Crest the UKs biggest milk processor, with an annual throughput of about 3bn litres.

"It will give Dairy Crest much greater buying power," says Roger Metcalf of Agrifood Consultants. "That means supplier groups – including the new Milk Marque daughter co-ops – will have much less bargaining room when it comes to price discussions," he says. "No longer can they play one off against the other."

The new Dairy Crest is also likely to increase direct supplies, currently about 60%, which will add to supply groups problems. "There will be a greater trend towards self-sufficiency," says Mr Metcalf.

But others believe the move will help create the more efficient UK processing sector that many farmer groups have been demanding, saying it should be good for producers – if they have the right trading relationship.

Axis, the midlands-based Milk Marque successor, remains optimistic. "We will do all we can to help make the merger a success," says a spokesman. "Farmers need successful customers. We will play a full part in the enlarged Dairy Crests plans for buying milk."

Farmers leaders are keeping a close watch, admitting there is some concern, particularly in the south west and some central areas where Dairy Crest and Unigate were strong.

"We are waiting for the proposal to filter through and pan out in terms of contracts," says Tom Hind, NFU assistant milk adviser. "It marks a stark contrast to the breaking up of Milk Marque, and we will need to monitor it closely. But there are some views that a dedicated dairy company with a full spectrum of products may be a good thing. Our priority must be to ensure farmers get a fair share of returns."

The merger marks the second big move to rationalise the UK processing sector, after Expresss take-over of Glanbia last summer.

In the year ended March 1999, Dairy Crest reported a turnover of almost £774m, and pre-tax profit before exceptionals of £45m. But profit growth has slowed recently. At the end of 1999, Dairy Crest announced it was buying back 10% of its shares.

Unigates dairy and cheese arm achieved a similar turnover of £749m in the same period, and an operating profit of £51.5m

Dairy Crest will issue about 76m new shares to Unigate shareholders, and has taken on £100m of debt. Savings of about £25m within three years are envisaged. It will also provide for more growth, and further acquisitions are planned. &#42