The Wattle Health Australia Ltd (ASX: WHA) share price has had a positive start to the week after returning from its trading halt.
The organic dairy and infant formula company's shares were up as much as 8.5% in morning trade before fading as the day went on.
At the time of writing the Wattle Health share price is up 2.5% to $1.02.
Why is the Wattle Health share price on the rise today?
This morning Wattle Health advised that it has entered into a conditional purchase agreement with a wholly owned subsidiary of Mason Holdings Limited to purchase an additional 46% of Australia's largest independent nutritional dairy manufacturer, Blend & Pack.
Wattle Health will pay Mason Holdings Limited $46 million plus undistributed earnings for a stake in the company that will lift its total holding to 51%.
Management advised that it will also enter into a Put and Call option with Mason to buy its remaining 29% shareholding in Blend & Pack at a base purchase price of $30.1 million.
What is Blend & Pack?
Blend & Pack is the largest (by volume) independent, nutritional dairy processing and packaging business in Australia and an approved manufacturer by the Certification and Accreditation Administration of People's Republic of China (CNCA).
Its performance over the last couple of years has been reasonably mixed. In FY 2017 it recorded revenue of $26 million and EBITDA of $4.4 million. This fell to $20 million and $3 million, respectively, in FY 2018 and is expected to be similar this year.
However, that has been blamed on delays in gaining SAMR accreditation for its nominated brands. Management is hopeful this will come through soon and drive revenue to $31.2 million in FY 2020 and then $59 million in FY 2021.
The funding for the acquisition is intended to be raised via a debt issue which will be managed by international capital advisory firm, Exotix Capital. Management has taken this route to avoid diluting shareholders via another capital raising.
What now?
The company's executive chairman, Lazarus Karasavvidis, is pleased with the proposed acquisition.
He said: "With this acquisition WHA becomes a fully vertically integrated Australian organic dairy company with influence, control and bricks and mortar investments through the entire value chain – from the farm gate to the consumer."
While this appears to be a good move by management, I'm a touch sceptical on its forecast for FY 2020 and FY 2021. I suspect smaller players like Wattle Health and Bubs Australia Ltd (ASX: BUB) may struggle in China against bigger players such as A2 Milk Company Ltd (ASX: A2M), Bellamy's Australia Ltd (ASX: BAL), Danone, and Nestle if/when they receive their accreditation.
In light of this, I would stick with a2 Milk or Bellamy's for now and see how things unfold over the next 18 months.
