The Coca-Cola Company last Thursday announced completion of its acquisition of Chi Limited in Nigeria. Coca-Cola first announced a minority investment in Chi three years ago and, as planned, acquired full ownership of the company last week.
Chi is an innovative, fast-growing leader in the beverage categories, including juices, value-added dairy and iced tea. The company, founded in Lagos, Nigeria, in 1980, produces juice under the Chivita brand and value- added dairy under the Hollandia brand, among many other products. Coca-Cola acquired a 40 percent stake in Chi in 2016 from Tropical General Investments Group, the holding company for Chi Ltd. Juices and value-added dairy categories rank among the fastest-growing beverage segments in Nigeria and Africa.
This acquisition further signals Coca-Cola’s optimism about Africa’s consumer opportunity and a commitment to its long-term investment and growth plan on the continent, where it has been present for more than 90 years, Coca-Cola said.
“Coca-Cola is continuing to evolve as a total beverage company, and Chi’s diverse range of beverages perfectly complements our existing portfolio, enabling us to accelerate expansion into new categories and grow our business in Africa,” said Peter Njonjo, president of the West Africa business unit of Coca-Cola. “We will support the Chi management team in building on the company’s remarkable heritage and achievements, while using the scale of the Coca-Cola system to replicate their success in more markets across Africa.”
Financial details of the deal were not disclosed at a news conference in Lagos on Thursday, but Coca-Cola’s 40 percent acquisition in 2016 was said to be around $230 to $250 million. Analysts think the deal could be around $500 million to $600 million.
The acquisition is targeted at building billion-dollar beverage brands in Nigeria that will expand to many parts of Africa, said Peter Njojo, president of Coca-Cola Company in West Africa.
In 2016, there were positive signs that manufacturers were tilting towards mergers and acquisitions (M&As).
It started with Olam Nigeria acquiring BUA Group’s flour business in a deal worth $275million.
Foam maker Vita Foam and Vono Products merged that year, while GSK Consumer Nigeria plc received a non-binding offer from Suntory Beverage & Food Limited to take over the former’s drinks business. This deal has so far been sealed.
Later in the year, Japanese food maker Ajinomoto acquired 33 percent stake in pan-African FMCG company Promasidor, in a deal valued at $532 million.
In the early part of 2016, analysts had predicted more M&A deals, but foreign exchange woes and recession cut short this dream that year.
More than any sector, Nigerian manufacturers need M&A deals to achieve economies of scale. Coca-Cola, for example, is a clear leader in the drinks business in the country.
Coca-Cola is also the leader in Nigeria’s bottled water market, estimated at N938 billion, according to a recent report by Euromonitor International. Currently, Coca-Cola has a strong presence in many countries, with a strong consumer base.
Chi Limited, on the other hand, led yoghurt and sour milk products in 2018, operating an effective distribution network nationwide, through which it leads many food and drink products such as fruit juice. It has ensured strong popularity for its Hollandia brand, said Euromonitor International in its September 2018 report.
But Chi does not have Coca-Cola’s distribution strength. Coca-Cola has the capacity to deliver Chi products to all of its branches across Africa, where Chi, on its own, cannot get to. This reduces logistics costs and raises revenue. It will also lead to more dividends for shareholders.
Already, Coca-Cola has launched Hollandia in South Africa and is launching in Kinshasa, Democratic Republic of the Congo, and Ghana.
“Essentially, a business will attempt to merge with another business that has complementary strengths and weaknesses,” said Rob Renaud, an investment analyst at Investopedia, an investment and business outfit.
“Mergers can give the acquiring company an opportunity to grow market share without having to really earn it by doing the work themselves. Any M&A deals allow the acquirer to eliminate future competition and gain a larger market share in its product’s market,” Renaud said.
The manufacturing sector suffers from high production cost, which makes competitiveness difficult.
Forty percent of manufacturing expenditure goes to alternative energy. Manufacturers have spent N212.85 billion on alternative energy sources between the second half of 2016 and the first half of 2018, according to data from the Manufacturers Association of Nigeria (MAN). This is over 100 percent higher than what was incurred in the previous four halves. Manufacturers told BusinessDay that logistics costs have risen by 50 to 100 percent in the last two years, owing to poor state of roads and lack of a good transport system.
Poor infrastructure such as roads and absence of functional railways are not helping matters.
The result of this is that manufacturers are increasingly reducing the size and spread of their plants to cut costs.
Procter &Gamble shut down its $300 million consumer goods plant in Agbara in July 2018 to concentrate on its Ibadan plant. Nigerian Bottling Company closed down its Enugu plant in 2018. Unilever sold its Blue Band in 2018.
Nnaemeka Achebe, Unilever chairman, gave the reason for the company’s decision. He said the spreads business was under-performing. He pointed out that the transaction would enable the company to focus more on other well-performing categories.
“It is a no-brainer,” said one of the manufacturers, whose firm is considering a merger in the near future.
“Many manufacturers are struggling and except there is a merger, some will die.”
He explained that sourcing raw materials locally was becoming difficult, meaning that more foreign exchange was now being sought to import inputs.
“This, alone, can cripple you as a manufacturer, which is why we need M&As.”
ODINAKA ANUDU
