All systems go for Dairy Crest and First Milk deal

First Milk has confirmed it is set to buy the vast majority of Dairy Crest’s supermarket own-label cheese business.

If the co-op’s 3000 members approve the £62m deal, due to complete on 14 October, First Milk will move overnight from a milk broker into what it claims will be the UK’s largest cheesemaker.

It will take control of about 55,000t of production at Dairy Crest’s Cheddar creameries at Aspatria in Cumbria and Haverfordwest, Pembrokeshire – in which it already has a 20% stake.

Asda buys most of the 30,000t of the cheese produced at Aspatria and said it planned to continue with the arrangement after the takeover.

Dairy Crest’s pre-packing and whey-processing plant at Maelor, near Wrexham, is also included in the package.

According to Dairy Crest, the businesses being sold made an operating profit of £3.4m on sales of £194m for the year ending 31 March 2006. Lower cheese prices, however, might affect profitability this financial year.

Despite this limited profitability, First Milk chief executive Peter Humphreys said the purchase made sense for the co-op. “This takes us away from being a price taker to a price maker.”

Mr Humphreys said First Milk would now have a direct relationship with retailers and food-service customers. A market-related pricing structure would be introduced in the next six to nine months and he would be looking to pay members a dividend in the future, he added.

The acquisition, which includes about £40m of cheese stocks, and its initial operating costs will be partly funded by cash reserves, increasing the co-op’s existing borrowing facility from £30m to over £100m and extending the 0.5p/litre members’ capital retention until March 2009, he said.

Industry reaction to the move has been largely positive. NFU dairy board chairman Gwyn Jones said: “This is very welcome news. The NFU has firmly advocated dairy farmers taking a much greater stake in milk processing.”

First Milk member Alan Warrington, who milks 250 cows near Stafford, said: “I’m very pleased. I think this is the first step in a long-term strategy. We’ve been saying for ages we need to get closer to consumers.”

Independent consultant Mike Bessey said: “They’re not going to make a quick buck, but once in processing there is the potential to add value and invest in brands.”

But not everybody is happy. About 60% of the 0.5bn litres of milk used by Aspatria and Haverfordwest is already supplied by First Milk. However, 230 members of direct supply group Dairy Crest Direct, some of whom, ironically, have just defected from First Milk, will be affected.

Alan Lowrey, the DC Direct director representing the farmers, said he felt betrayed and estimated that moving to First Milk would cost them up to 1.5p/litre.

Arthur Reeves, Dairy Crest’s milk purchasing director, said the suppliers could stay on their Dairy Crest contracts for 12 months while they decided whether to move to First Milk or look elsewhere.