While Kerry Group surprised the market when it announced that it had entered talks to take over Golden Vale, it came as no surprise this week when the offer was declared unconditional. Compared with Kerry's acquisition of Beatreme Foods in 1998, the acquisition of Golden Vale can be categorised as a modest bolt-on.
Beatreme gave Kerry its foothold in the higher margin and rapidly growing food ingredients business. Since then organic growth and a string of acquisitions have made Kerry a leading global player and approximately 75 per cent of Kerry's profits are generated from the ingredients business.
The company's stated strategy is to focus its expansion on the more exciting prospects available in food ingredients rather than in the lower-margin basic food-processing activities.
Although the acquisition of Golden Vale does not fit neatly into this strategy, it will provide Kerry with greater scale in its milk processing and snack food businesses. Kerry's management should be able to reap the benefits of greater economies of scale, thereby enhancing the profit margin of these businesses.
One of the more significant aspects of the announcement this week was that more than 80 per cent of shareholders accepting the offer opted to take Kerry shares, with the remainder taking the all-cash alternative. Therefore, the acquisition will barely make a dent on Kerry's balance sheet, leaving it free to pursue acquisitions in the food ingredients sector.
Indeed the broadening of its shareholder base enhances Kerry's ability to raise long-term capital from the stock market.
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