I’m not big on breakfast. Honestly, if I have toast or cereal, I feel like vomiting. Not because I don’t like the taste, I end up feeling too full. Of course, many people love to tell me I’m crazy. Breakfast is the most important meal of the day, right?
My partner enjoys her breakfast. Normally, she will have some toast, maybe with a bit of vegemite and cheese. Well, I had great news for her this morning. Her two favourite things for breakfast are coming together. And I’m not talking about the toasted bread.
This morning, Bega Cheese Ltd [ASX:BGA] announced it would pay $460 million for some of Australia’s most iconic brands. They are taking over Mondelez International’s Australia and New Zealand grocery and cheese business.
Mondelez owns Vegemite, ZoOSh and Bonox brands. Two of which you could find regularly in my home.
Bank debt will fund the AU$460 million. Bega said near-term corporate opportunities will help pay down the debt. The Mondelez business could generate pro-forma net revenues of $310 million. It would represent earnings before interest, tax, depreciation and amortisation of between $40–45 million in its first full year. Bega assured shareholders that earnings would add to strong earnings per share.
Bega’s share price rocketed up this morning, opening to a high of $5.05 per share. That represents the company’s high for 2017; they are now up 17.99% year-to-date.
Source: Google Finance
Where to from here?
So is the acquisition good or bad? Let’s simplify it.
Mondelez’s business must add to Bega’s earnings. The fee paid to Mondelez must come back to Bega in a certain number of years. The Mondelez business must also return more than similar opportunities.
If that happens, then it’s a great investment for Bega. It’s probably obvious to you, but it’s all about earnings. Earnings drive share prices and, in large part, the volatility of stocks. If earnings and growth are uncertain, stocks become more volatile.
Bega’s executive chairman, Barry Irvin, believes that ‘the wonderful heritage and value that Vegemite represents and its importance to Australian culture makes its combination with Bega Cheese truly exciting.’
But, in due course, investors will see how exciting this investment could be. Bega will release their half-yearly repots for the financial year 2017 in February. While they might not have much information to go on, figures and trends can be used to see if they are on track.
Bega might be a stock you’ll want to look at for the future. Aussie brands and additional products could positively impact long-term earnings.
Junior Analyst, Money Morning
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