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Infant formula producer Bubs (ASX: BUB) is making yet another bold move, acquiring a Melbourne dairy producer for $35 million.
Bubs will purchase Australian Deloraine Dairy for $25 million in cash plus $10 million worth of Bubs shares.
If certain performance targets are met there will be further payments of up to $15 million to the Deloraine vendors.
The deal comes as Bubs has been ramping up its production efforts and homing in on the Chinese market for its unique organic baby formula products. These movements include an agreement with a major Chinese baby goods company and a partnership with dairy giant Bega (ASX: BGA).
Deloraine is one of only 15 licenced canning facilities in Australia authorised by Chinese regulators to export into China.
Bubs and Deloraine first entered into a manufacturing agreement in June 2018 for Deloraine to produce Bubs goat milk infant formula and CapriLac goat milk powder products.
Deloraine's plant has the capacity to process 10 million tins with its existing production line and could double capacity with incremental capital expenditure in the future, according to Bubs.
Bubs founder and CEO Kristy Carr says the acquisition of Deloraine is another important step in its plans for China.
"This is a key foothold in Bubs vertical-integration strategy to maximise control of our supply chain and represents an important step in our vision to expand our China business," says Carr.
"Importantly, the acquisition will have a significant positive impact on our business through a material reduction in our production costs, as well as placing Bubs in the best possible position to achieve SAMR brand registration to enable the company to export their infant formula products to China to be sold in physical mother and baby stores."
Deloraine's business is not expected to be materially impacted by the acquisition with the principal and general manager remaining on board to steer the subsidiary.
"We believe this is a win-win all round for Bubs and Deloraine's customers, suppliers, relationship partners and employees alike," says Carr.
The company has also announced today that it has entered into an agreement for a private share placement at $0.65 per share to China-focused private equity firm C2 Capital Partners. This will raise around $31.44 million for Bubs.
Following the placement, C2 will also acquire additional shares in Bubs via off-market share acquisitions from existing shareholders, the NuLac Food Vendors, giving it an aggregate 15 per cent holding in Bubs.
As part of this significant investment C2 managing partner Steve Lin will join the board of Bubs as a non-executive director.
C2 was established in 2018 to invest in companies capitalising on the consumption growth and consumption upgrade of the growing Chinese middle class.
"We are honoured to welcome C2 Capital Partners to our register," says Bubs chairman Dennis Lin.
"As well, acquiring Australia Deloraine Dairy provides us with a strategic advantage through the vertical integration of our value chain a critical factor for success in the infant formula market, particularly for Australian brands seeking to enter China."
Shares in Bubs are up 0.62 per cent to $0.81 per share at 10.30am AEDT.
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