Cherkizovo Consolidates Russian Meat Market

RUSSIA - The proposed acquisition of two pig farms in the Penza and Lipetsk regions of Central Russia is expected to increase the Group's pork output by 30 per cent.
calendar icon 25 March 2010
clock icon 4 minute read

OJSC Cherkizovo Group, one of Russia's leading integrated and diversified meat producers, has announced the proposed acquisition of two greenfield pork complexes which is expected to increase the Group's current production capacity in the high-margin pork business by almost 30 per cent. The proposed acquisition reinforces the Group's commitment to consolidating the Russian meat market. Further information will be released once the terms of the acquisition have been agreed.

Cherkizovo Group has signed a Memorandum of Understanding (MoU) with an entity controlled by the Cherkizovo Group's main shareholders to acquire the controlling interest in two pork production farms located in the Penza and Lipetsk regions of Central Russia. The farms are best-in-class integrated multi-site complexes, operating 4,800 sows with an expected full capacity of 12,500 tonnes of live weight per year at each farm. Each complex includes separate breeding, rearing and fattening facilities, using state-of-the art technology and equipment from Danish company DanBred, the world's leading supplier. The complexes are amongst the most advanced facilities of their kind in Europe.

Both farms are newly constructed greenfield complexes. The Penza complex was completed and launched in 2008, and the Lipetsk complex, completed in late 2009, was launched in early 2010. The complexes are expected to reach a combined output of approximately 12,000 live-weight tonnes in 2010, rising to approximately 20,000 live-weight tonnes in 2011. The complexes are expected to reach their full combined capacity of 25,000 live-weight tonnes in 2012, resulting in an increase in Cherkizovo Group's pork production capacity of almost 30 per cent from the Group's current overall pork production capacity.

In addition to providing an increase in production capacity within a high margin business, the transaction is also expected to deliver substantial cost and scale synergies, based on the farms' proximity to Cherkizovo Group's existing pork and processing production facilities in the Penza and Lipetsk regions.

Subject to satisfactory due diligence and agreement on the final terms of the acquisition, the total consideration for the transaction is expected to be in the region of US$100 million, of which US$20 million will be payable in cash. The Group will assume the acquired entities' outstanding debt at time of acquisition, which is expected to be approximately US$80 million. The debt was raised to fund the construction of the complexes and is comprised of eight-year Government-subsidized loans provided by Sberbank and RosSelhozbank. The acquisitions will incur no further capital expenditure other than maintenance as the construction of the farms is completed. The transaction is expected to close in the second half of 2010.

In line with the Group's commitment to follow best corporate governance practice, as the proposed acquisition is a related party transaction, it remains subject to approval by the independent members of the Board of Directors of OJSC Cherkizovo Group.

Sergey Mikhailov, CEO of Cherkizovo Group, said: "We are delighted to announce this deal, which pioneers the consolidation of Russia's meat market, and is fully in line with our long-term strategic commitment. The transaction represents the first acquisition of state-of-the-art greenfield facilities of this kind in Russia. The Group's pork division is already a well established, high margin business and a key contributor to the Group's growth and profitability and this acquisition provides scope for further expansion in the Group margin through synergy benefits, while delivering a step-change in volumes.

"Total Group pork production volume in 2011 – once the facilities to be acquired are operating at close to full capacity – is expected to exceed 100,000 tonnes, which is expected to reinforce the Group's position as one of the top players in Russia's pork production industry. The management team regards this transaction as a significant milestone for the Group, and we look forward to its completion."

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