Weak growth drives small-scale mergers in SA’s food industry

Small-scale mergers in the food sector are expected to become a trend in South Africa’s food industry, as winning Competition Commission approval is less onerous than for big mergers.

The largest corporate merger in South Africa in recent years involved the billiondollar transaction between global beer giant, Anheuser-Busch InBev and SABMiller. The deal faced regulatory constraints from the commission but got the go-ahead.

More recently, though, companies in South Africa have been merging operations or buying brands in a bid to increase market share.

Figures from the Competition Tribunal indicate that mergers are on the rise. Between April last year and March this year it handled 130 cases for mergers across various sectors, up from the 116 cases between April 2016 and March 2017.

Last month, VKB Agri Processors acquired control of VKB Flour Mills, a manufacturer and supplier of flour, bread and other bakery products.

The tribunal also approved the merger of investment company Philafrica Foods and savoury snack manufacturer Zutco and Pakworks. Zutco and Pakworks are contract manufacturers of savoury snacks on behalf of Simba.

Sundale Free Range Dairy in the East London Industrial Development Zone this week merged with Just Milk, the largest organisation of dairy farmers in the country, to acquire cheese operation Cookhouse Creamery, previously owned by DairyBelle.

Sundale CEO Pierre van Rensburg said its interest in Cookhouse allowed it to extend operations beyond the borders of East London.

Wessel Lemmer, senior agricultural economist at Absa, said whenever there was weak economic growth, companies did not show sufficient profit to reinvest and improve productivity.

“In an environment of increased policy uncertainty, local and foreign investment stalls. Under these circumstances, our industries fall behind competing industries abroad, making us vulnerable to global competition.

“In order to keep up, mergers share overheads and cut down on unnecessary costs in order to keep the average production costs in check. Consumers are also under pressure and cannot pay more,” he said.

One of the more high-profile transactions to get the nod lately was Unilever South Africa, which was allowed by the Competition Commission last month to dispose of its spreads division to Remgro. The deal was first announced in September. Remgro now has control of popular brands such as Flora, Rama and Stork margarine. The Unilever spreads business is worth an estimated R7-billion.

Although profitable and cash-generative, the spreads business has weighed on Unilever’s total revenues and has been contracting for years.

In July last year, Unilever said the rate of decline in spreads revenues had slowed to 3.7% in the first half, with growth in emerging markets partially offsetting falls in developed countries.

Adrian Cloete, a portfolio manager at PSG Wealth, said it was “a great deal” for Remgro and made a lot of sense from a strategic perspective.

“Unilever’s spreads business in South Africa has nice brands like Rama, Flora, Stork, Rondo, Marvello and Meadowland. By owning 100% of the Unilever spreads business in South Africa now, versus a non-controlling 26% holding in a larger company, Remgro is now in full control of its destiny,” he said.

“As Remgro also has a 77.2% effective shareholding in RCL Foods it now fully controls two sizable consumer products businesses. Remgro has in recent years added further consumer branded products into RCL to enhance the quality of RCL’s brand portfolio to get a higher market rating for RCL Foods.”

Market research provider Euromonitor said there was a trend in South Africa by leading packaged food manufacturers to focus “on acquisitions over and above investing in new product development” to extend their market share.

Rhodes Food Group entered several packaged food categories, such as baby food, prepared salads and pickled products, in which it had not previously been present, while Clover purchased DairyBelle’s yoghurt operations in 2014. With that, its market share increased significantly.

Pioneer Foods acquired 50% of fortified food producer FutureLife, which enabled Pioneer Foods to compete in this product category.

“These acquisitions continued to consolidate the number of players in the packaged food market in South Africa,” Euromonitor said in an e-mailed note this week.

The packaged foods business in South Africa, according to Euromonitor, last year had a combined retail value of $14.82-billion.

Cloete said the tendency among some of the big corporates such as Tiger Brands in recent years had been to unbundle some of their operations, rather than to merge.

“When you merge two businesses in the same category there is a high risk of job losses and it is more difficult to do mergers in the food industry in order to cut costs.

“Most of the companies looking for acquisitions are going into Africa; Pioneer and Tiger Brands are looking to the continent to diversify their business. The South African market is relatively mature and if one is looking for opportunity it is largely in Africa.”