FrieslandCampina and Milcobel: a dream merger?

It was clear that both were looking for a partner, especially because they saw their milk volume continue to decline. At FrieslandCampina, this seems to be fine at first glance, although a 16% decline since peak year 2016 is no easy task. Milcobel has been hit harder. There, supply has almost halved since peak year 2020. Although it is difficult to get a precise picture of the development of the volume of member milk. Over the past five to six years, Milcobel has processed an increasing volume of non-member milk by purchasing on the spot market. 

Ysco comes to the rescue
The number of members also fell sharply at both cooperatives, due to business closures and members leaving for competitors.
Both dairy companies have also had difficult years. FrieslandCampina may seem even more difficult than Milcobel at first glance, but that needs to be qualified. In the case of Milcobel, the picture is distorted because this company was regularly able to make up for losses in the dairy business with the earnings of subsidiary Ysco. For example, Milcobel Dairy suffered a loss of €2023 million in 44, but because Ysco booked a profit of almost €38 million in the same year, the damage remained limited.

FrieslandCampina does not have such a high-yielding subsidiary, unless it is DFE Pharma, in which it has a 50% stake and which generated a profit of €127 million last year.

From business to bank account
In any case, Ysco was the redeemer at critical moments. And where FrieslandCampina continued to pay a high milk price over the years, even when things were difficult, Milcobel had not been able to do so for a long time. 

When Milcobel finally decided to sell Ysco last year, it may have been a good time from a market perspective, as it came just after a year of record profits, but it also meant that there was nothing left to absorb the losses from the dairy business, apart from a temporarily swollen bank account.

Dairy branch speckled
The proceeds of the sale have not been officially announced, but according to well-informed sources they yielded around €200 million. This will pay off a significant portion of the accumulated debts. Some of the money will also go to the members. Remarkably enough, or perhaps not surprisingly, such a financially charged Milcobel became a more interesting partner for other dairy companies. Last year, discussions were held with several (Dutch) companies, but Milcobel ultimately opted for FrieslandCampina, which undoubtedly also did its best to hook the Belgian colleague. FrieslandCampina was able to acquire the very welcome addition to the milk volume. That may have cost a bit, but thanks to Ysco not very much. Milcobel has finally found a stronger partner and can also offer the members the prospect of a much-desired higher milk price.

Overcapacity
Outwardly, it will be a merger in which no one suffers. However, that does not really make sense. Despite the closure of factories in Leeuwarden and Born announced last year, FrieslandCampina still has overcapacity. Milcobel has the same problem, especially since after the merger it makes less sense to buy a lot of milk, as was the case in recent years, because lines no longer necessarily have to be full. Although FrieslandCampina is also committed to recruiting even more members in Belgium and Northern France, this expected influx is out of proportion to the total overcapacity. Moreover, Milcobel also owns a number of structurally unprofitable locations. Kallo and Moorslede are mentioned. The logistics apparatus will also very likely be critically examined. A restructuring is therefore necessary at some point.

That's not all there is to it. Milcobel members can join FrieslandCampina quite smoothly thanks to the Ysco bonus. With that and their own member capital, the €8 per 100 litres in costs for delivery certificates can be met. No further entry fee needs to be paid.

Whey partner Arla
There is still a case to be settled with Arla, with whom Milcobel has concluded an agreement for the processing of whey from Langemark. Together with Arla, €20 million has been invested in an ultrafiltration unit for this purpose. Arla has provided a loan for this purpose and a long-term delivery agreement has been made. It is of course possible that the merger will not change this, but FrieslandCampina will also be interested in an additional volume of many millions of tonnes of high-quality WPCs annually. It is a product with a high profit margin and could therefore very well be a bone that will still be fought over.