A2 surges on Bellamy deal news

Shares in a2 Milk rallied sharply after news emerged that Chinese dairy giant Mengniu would pay a 59 per cent premium to buy one of a2’s closest peers, Bellamy’s Australia.

Bellamy’s said Mengniu would buy the Aussie infant formula maker for A$1.43 billion ($1.54b) under a scheme of arrangement.

Mengniu is offering A$13.25 a share compared with Friday’s close of A$8.32.

Shares in a2 Milk hit a session high of $15.40 on the news, then retraced to $14.98, up 95c or 7 per cent from Friday’s close.

A2 Milk’s supplier, Synlait Milk, rallied by 30c to $9.30.

Mengniu’s cash price represents an enterprise value of 30 times Bellamy’s normalised full-year earnings before interest, tax, depreciation and amortisation (ebitda).

On consensus earnings, a2 Milk is trading on 20.6 times its 2020 forecast

Based on this transaction, it makes a2 Milk look undervalued. Shane Solly, Harbour Asset Management

ebitda. The Bellamy’s board has unanimously recommended that shareholders vote in favour of the scheme.

Australian fund managers regularly lump Bellamy’s — which specialists in making organic infant formula — with a2 Milk, which makes formula using milk containing just the a2 beta protein.

Shane Solly, portfolio manager at Harbour Asset Management, said Mengniu was offering a “massive” premium.

“The implied multiple on that is quite supportive for the a2 Milk share price,” he said. “It’s a bit of difference in terms of valuation.”

Bellamy’s — like a2 Milk — attracts short selling — the sale of a share that the seller has borrowed.

The short seller profits if the share price declines by picking it back up later at a lower price, but when the market turns in the stock’s favour, the shift higher can make the move more dramatic than it would do otherwise, triggering a short-covering rally.

Solly said it looked like a shortcovering rally was already taking place with a2 Milk.

“It’s a reminder that there is a good underlying business within a2 Milk that is attractive to global buyers,” he said. “Based on this transaction, it makes a2 Milk look undervalued.”

A2 Milk is also understood to be conducting an investor education day in Shanghai this week.