Tnuva Valuation Down 40% Since Being Acquired by Bright Food

Giant dairy company estimated to be worth just NIS 5 billion amid falling sales and profits.

Yoram Gabison
Yoram Gabison
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Tnuva's cottage cheese.Credit: Tal Mayer
Yoram Gabison
Yoram Gabison

Less than 18 months since China’s Bright Food bought Tnuva, Israel’s biggest food maker, the company has lost some 40% of its value amid sagging profits and market shares.

Tnuva’s troubles have been known for some time, but on Wednesday a report by the consulting firm TASC quantified the size of the problem, saying that Tnuva was probably worth just 5 billion shekels ($1.3 billion), compared with the 8.6 billion valuation at which it was acquired in March 2015.

TASC based its estimate for the company, which is 76.7% owned by the Chinese company and the rest by a group of kibbutzim, based in part on steadily dropping sales. Tnuva’s revenues were 7 billion shekels in 2013, dropping to 6.6 billion last year and in the first half of 2016 were about 3 billion shekels.

Meanwhile, earnings before interest, taxes, depreciation and amortization shrunk from 793 million in 2014 to 695 million last year. This year it is forecast to reach just 317 million shekels.

The valuation was done at the behest of a consortium of Israeli banks, led by Bank Hapoalim, which had lent Bright Food money to buy Tnuva. Bright Food asked to refinance the loan into a three-year credit, but the banks doubtful about Tnuva’s finance insisted on tougher terms, including an interest rate of 4% and stronger collateral.

In the end, they agreed to lend 1.25 billion shekels to the Chinese company with Tnuva shares as collateral and another 550 million against guarantees provided by a Singapore bank.

That still leaves Bright Food with a troubled business. When the Chinese company bought Tnuva it was one of the pioneering Chinese investments in Israel and a marriage between China’s global aspirations and emerging status as a world economic power and Israeli technological prowess.

Apart from its leading position in the Israeli food market and its flagship cottage cheese product, Tnuva had dairy technology the Chinese were anxious to get a hold of as the Chinese have developed an appetite for cheese and other Western foods.

Bright Food, a food and beverages manufacturing company headquartered in Shanghai, bought Tnuva from the British private equity fund Apax and the Israeli holding company Mivtah Shamir based on its 2014 financial performance.

But already the company was running into problems. The government imposed price controls on two key products – sweet cream and white cheese – that cut operating profit by 80 million shekels that year. Not long afterwards, the market for yellow cheese was thrown open to limited import competition. Tnuva controlled 88% of the market, bringing in revenues every year of 1 billion shekels.

Last year, the company was dealt another blow when Super-Sol, Israel’s biggest supermarket chain, launched a line of private label milk, cutting its purchases from Tnuva by 44 million shekels to 600 million last year.

Making things worse, the No. 3 dairy began competing aggressively on prices. Tara’s parent company, Central Bottling Company, had invested 1 billion shekels in a new dairy facility and wanted to get back a return on its capital.

The TASC report showed the result has been a sharp deterioration in Tnuva’s market share, which fell to 52.4% in the first half from 55.6% a year ago. Strauss Group, Tnuva’s biggest rival, grew its share to 24.7% from 24% while Tara increased its share to 13.5% from 12.8%.

Bright Dairy, a unit of Bright Food, had planned to buy Tnuva from its parent company and finance the acquisition via a $1.4 billion share offering slated for last March. But with Tnuva’s sales and profits falling, the offering was pulled.

Tnuva’s problems led to its CEO Arik Schor stepping down last January. His successor, Eyal Malis, however, hasn’t been able to reverse the company’s fortunes, despite offering deep discounts on products. A plan to cut 500 workers from the payroll has run into opposition from unions.

Bright Food’s representative on the Tnuva board, Yossi Shahar, recently stepped. Plans to begin exporting yellow cheese to China have stalled.

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