South African food company could buy 80% stake in Nigeria’s Dangote

  

Bloomberg reported that South Africa’s foremost food producer Tiger Brands, on Monday, said that it is in talks with Dangote Industries over the Nigerian conglomerate’s stake in its flour milling unit.

Aliko Dangote

Aliko Dangote

Dangote Industries, Aliko Dangote’s personal investment vehicle, owns 73% of the company with local and foreign investors holding the 27% balance. Tiger Brands is reportedly gunning for an 80% stake in Dangote Flour Mills (DFM) which, if successful, will significantly increase its presence in the food industry of Africa’s most populous nation given its 49% shareholding in UAC of Nigeria, another Nigerian consumer facing company that it acquired in 2011.

The acquisition is in keeping with Tiger Brands CEO’s Peter Matlare’s statement late last year that the company was still “looking hard” for acquisitions in Africa regardless of the numerous acquisitions across the region earlier in that year.

2011 saw the group acquiring Davita Trading – a South African based export company, 51% of the food and consumer interests of East Africa Group of Companies in Ethiopia and of biscuit manufacturer Deli Foods in Nigeria. In Zimbabwe, Tiger Brands increased its hold on National Foods, the largest miller in that economy, adding 11.7% to its holding to take it to 37.4%.

Dangote Group has reportedly indicated its strategic change in focus towards infrastructure and power, and expectations were that its sugar, salt, flour, rice and pasta businesses will be sold off or restructured in a manner that takes the day to day running away from the group. It is therefore not surprising, that despite being only about seven years old and as such endowed with fairly new and comparatively efficient plants, Dangote Group is already looking for an exit.

The Nigerian flour market is highly concentrated with the top three flour millers, namely; Flour Mills Nigeria (FMN), DFM and Honeywell Flour Mills (HFM) accounting for around 85% of the market share. The industry relies on wheat imports, although ongoing reforms in the sector envisages an 80:20 blend of wheat and cassava flour, respectively, for Nigeria.

The industry provides an important ingredient for one of the nation’s staple foods: bread, which takes up about 80% of flour milled in Nigeria.

DFM is the second largest producer of bread and general purpose flour after FMN. It has capacity for 1.5 million tons of flour per year, giving it a 23% share of production capacity. It has a hold on 17% of the market share, behind FMN, which has 50%.

Flour milling capacity in Nigeria is, however, well ahead of consumption with DFM only producing around 450 million tons as at the end of 2010, testifying to the existence of excess capacity. Its milling business includes semolina, an increasingly consumed staple food and bran, which is used mainly for animal feeds. DFM also produces pasta and noodles as well as sacks though its subsidiaries Dangote Pasta, Dangote Noodles and Dangote Agrosacks Limited.

Milling operations historically accounts for about 70% of earnings, packaging 16% and noodles 14%.

While an acquisition by a company with years of experience in food production of a fairly efficient business in a market with the demographic dynamics of Nigeria can only be value adding, we believe the message it sends out regarding the scramble for the African consumer cake is more important.

We have been bullish on sub-Saharan African consumer facing companies and still maintain our call for investors to seek exposure in the sector with breweries, telco companies and food producers being among our top picks.

Imara is an investment banking and asset management group renowned for its knowledge of African markets.




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