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A2 Milk (ASX:A2M) shares rises on acquisition news

A2 Milk Company Ltd (ASX: A2M) shares are up more than 2% after it announced it may make an acquisition.

What’s the acquisition?

A2 Milk has said it’s in discussions with Mataura Valley Milk (MVM), a New Zealand dairy nutrition business, to explore options for A2 Milk to participate in manufacturing at MNM’s facility in Southland, New Zealand.

After these discussions, A2 Milk has made a non-binding indicative offer to acquire a 75.1% interest in MVM for a total consideration of approximately NZ$270 million, based on an enterprise value of around NZ$385 million.

MVM has agreed to give A2 Milk a period of exclusivity to conduct confirmatory due diligence and negotiate definitive transaction documentation.

These arrangements are supported by MVM’s current majority shareholder, China Animal Husbandry Group (CAHG), which would retain a 24.9% interest in MVM alongside A2 Milk. CAHG is a wholly owned subsidiary of China National Agriculture Development Group, which is also the parent company of A2 Milk’s strategic partner in China, China State Farm.

The discussions are still ongoing. If a deal can be agreed then it’s expected to settle towards the end of FY21 and it would be funded from existing A2 Milk cash reserves.

A2 Milk CEO Geoff Babidge said: “As previously announced, due to the increasing scale of our infant nutrition business, we have been assessing participation in manufacturing capacity and capability. The potential investment in MVM’s recently commissioned facility, alongside, CAHG, alings with this strategic objective as we look to complement and build open our current strategic relationships with Synlait Milk (ASX: SM1) and Fonterra (ASX: FSF), which remain in place. Our intention would be to invest further to establish blending and canning capacity at Mataura’s facility to support the establishment of a fully integrated manufacturing plant for infant nutrition.”

Summary

This seems like a good move by A2 Milk. The infant formula business continues to sell more and more product each year, so it needs to increase its manufacturing capacity to ensure it can meet the growing demand. Having majority ownership of manufacturing capabilities seems like a good idea to me. It already owns a minority (but sizeable) position in Synlait.

Having a bit of control of its manufacturing should allow for better pricing power and perhaps it may eventually mean that A2 Milk could manufacture a much larger amount of its own product. I’m not sure that’s the eventual goal though. I think that A2 Milk shares are a buy today, there is still plenty of growth potential and its valuation doesn’t seem too stretched when you look at other ASX growth shares.

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