Dairy Crest spreads out with £86.5m St Ivel deal

Dairy Crest sealed the acquisition of the St Ivel spreads business from Uniq yesterday for £86.5m, adding brands such as Utterly Butterly and Vitalite to its stable of margarines.

But the dairy group saw its shares dip 11 per cent after it issued a profits warning on the back of low cheese prices caused by a glut of milk earlier this summer. Analysts reduced full-year, pre-tax profit forecasts for the group from £85m to around £80m.

The cash deal, which also includes Uniq's Liverpool-based processing plant, creates the UK's second largest spreads business behind the market leader Unilever. Dairy Crest will fund the acquisition from new bank facilities.

It also completes the transformation of the old Unigate business into a chilled convenience group following Uniq's sale of its Shape yoghurts business to Danone of France in August. The new-look Uniq will solely supply supermarkets with own label and franchised products.

Drummond Hall, Dairy Crest's chief executive, said the deal, which leaves the Danish group Arla as the only other player in the UK spreads market, was subject to clearance from the Office of Fair Trading. He added, however, that this was expected to be a formality.

While the St Ivel business, which includes Carapelli olive oil and Golden Churn margarine, fetched a higher price than expected, analysts said it was justified because it made operating profits of £12.6m last year and is highly cash generative.

Mr Hall said the deal would enhance the company's earnings immediately. "It's very much a logical and strategic fit with the core of our business, which has been all about building brands. We will be the only major player able to offer retailers a complete range of products and brands." Any cost savings from integrating the businesses would be reinvested to strengthen the St Ivel brands, he said, adding that no staff redundancies were expected.

Dairy Crest, which is the UK's biggest Stilton producer, blamed the expected profits shortfall on high stock levels in the cheese market. It said milk supply had started to fall, which would reduce cheese stocks and boost prices in the second half of the year. Analysts said the market had probably over-reacted to the warning, which left its shares at 367.5p. "The group is usually very proactive in controlling expectations but in this market it's a very penal system," one food analyst said.

Bill Ronald, Uniq's chief executive who joined six months ago from Mars, said the disposal would leave its net debt at around £60m – below the £100m target set in June. "The big restructuring is now over, which means we can just get on with running the business," he said. Uniq shares gained 3p to 172p yesterday.