Ten years after acquiring a 51.4 percent stake in Illovo Sugar — Africa’s top sugar producer — Associated British Foods wants to buy the rest of the company, Agrimoney reported.
AB Foods intends to offer 20 rand ($1.24) per share for the stake it does not own, Illovo said in a statement. That would make the deal worth about 4.1 billion rand ($253.91 million), EyewitnessNews reported.
Durban-based Illovo has agricultural and manufacturing operations in six African countries including South Africa, Malawi, Zambia, Swaziland, Tanzania and Mozambique, Moneyweb reported. It employs 30,000 people who produce raw and refined sugar for local, African, E.U., U.S. and world markets from sugar cane supplied by its own agricultural operations and independent growers, according to the Illovo website.
Illovo manufactures products such as furfural, alcohol, agriguard, diacetyl, biomass sugar, ethyl alcohol and lactulose.
Furfural is a sister chemical to the increasingly popular hydroxymethylfurfural or HMF molecule, and it’s regaining attention as a bio-based alternative for the production of everything from antacids and fertilizers to plastics and paints, according to BiomassMagazine.
In addition to Illovo Sugar, London-based AB Foods owns assets in companies that process the U.K. beet crop, and cane processing operations in China.
Illovo Sugar has faced pressure on sugar prices from strong world supplies, Agrimoney reported. Production has been affected by the drought in Southern African that has sent the region’s corn prices to record highs.
South African sugar exports to the Europe Union have also been hurt by reforms that offer preferential access to sugar imports from countries deemed “least developed,” including Zambia.
Illovo’s shares have been depressed by the drought in its home market, Standard Bank Group Securities analyst Sumil Seeraj told Reuters.
“It is opportune for ABF to make the offer now and I think it is a bit low,” Seeraj said.
Illovo has been cutting costs to survive low sugar prices. ABF plans to make a cash offer to all other shareholders, Illovo said.
“Illovo certainly faces challenges, no doubt about that, but these are not new challenges,” said ABF’s finance director John Bason. “We take a long term view.”
Despite the pressures on the Johannesburg Stock Exchange-listed Illovo, there has been some plusses, Moneyweb reported:
These include inflationary pressures on costs; the impact of a weaker Zambian kwacha on costs there; the effects of yellow aphid infestation; and the impact of a weaker Malawian domestic market and stronger currency. These negative factors outweighed the positive effects of improved factory performances in Swaziland and Tanzania and the benefits of weaker currencies in SA, Zambia, Mozambique and Swaziland.
Illovo management said it lost 216.3 million rand ($13.4 million) when it closed its U.S. furfural-based nematicide business — mainly due to difficulties getting registered with the U.S. Environmental Protection Agency to apply the product on food crops. The company said this resulted in a 82-percent drop in attributable earnings, Moneyweb reported.
Illovo’s competitor in South Africa — Tongaat Hulett — has diversified into land development activities. Illovo, by contrast, “is very much a pure sugar play, deriving more than 90 percent of earnings from direct sugar operations,” according to Moneyweb. “This makes factors such as international sugar prices, climatic conditions and production levels important inputs into its prospects equation.”
Illovo is diversifying its earnings by adding more alcohol distilleries to its business while targeting possible opportunities in the blended fuel and electricity generation sectors. However, with these downstream sources currently contributing less than 10 percent to operating profit, its forecast is largely influenced by its take on world sugar prices, the company said, according to Moneyweb.