As Flour Mills of Nigeria acquires Honeywell Flour Mills what next for investors?

On Friday, April 29, one of the most talked-about acquisition deals in the history of corporate Nigeria was finalised. When the announcement of the deal between Flour Mills of Nigeria plc (FMN) and Honeywell Flour Mills plc (HFMP) was initially announced back in November, several commentators including yours truly, focused on analysing the rationale for the deal and the projected outcomes in terms of industrial capacity aggregation and economies of scale for food production and export across Africa.

What was perhaps not explored in similar detail was the investment upside offered by the new super-entity or indeed, why it should be considered an objectively good deal from a business point of view.

It is one thing for an acquisition to theoretically create large economies of scale and export possibilities, but it is another thing entirely for such an acquisition to actually be a good idea when judged by the only thing that counts in business – numbers.

The largest industry operator spending N80 billion to acquire a direct competitor in one of Nigeria’s key economic sectors is one of those deals that looks like it could be a masterstroke, but nobody outside of the participants in the transaction is particularly sure why. As always, the only way to arrive at a certain answer is to let the data, numbers and facts dictate a position, which is precisely what the next 600 words will try to achieve.

Tellingly, going by a statement about the acquisition from FMN, the acquisition intends to serve the interests of shareholders by providing access to new areas for growth, which extend beyond Nigeria

What do the numbers say?

Over the course of its six-decade history, FMN has come to be considered the undisputed market leader in Nigeria’s food processing space. Quite a few organisations reference lengthy histories and point to their well-known brands as proof of their alleged market leadership in their spaces, but FMN is one of the few blue bloods whose claim to market leadership is actually beyond challenge. Its nationally treasured Golden Penny range of flour, pasta, semolina, sugar, starch, oil, spreads and breakfast cereal has contributed significantly to FMN Group’s 62-year-old reputation.

Beyond grain milling, edible oil and sugar refining, however, FMN is one of the undisputed market leaders in other spaces, including agro inputs, animal nutrition and proteins, logistics and distribution, packaging and port operations. Operating out of its 17 manufacturing facilities across 12 states, the organisation has become one of the most formidable production and logistics operators in Nigeria, with a systemically important supply chain.

In FY 2021, its operating revenue stood at N772 billion, with profit after tax coming to over N25.7 billion. In the same year, FMN was ranked the ninth most valuable manufacturing company on the Nigeria Stock Exchange.

HFMP’s business history is also commendable with about 183 percent stock rise in 2021. Its N109.6 billion revenue in 2021 outdid its N80.5 billion 2020 revenue by 36 percent. Its N7.6 billion operating profit in 2021 also outstripped the previous year’s performance by 39 percent. Essentially, these are two powerful corporate entities with healthy year-on-year performance and potentially vast amounts of individual investment upside. The acquisition presents a once-in-a-generation opportunity for long-term investment and value creation.

The announcement indicated that both companies will maintain separate stock market listings which indicates a long-term interest in integration as against short term corporate raiding. Tellingly, going by a statement about the acquisition from FMN, the acquisition intends to serve the interests of shareholders by providing access to new areas for growth, which extend beyond Nigeria. It also promised to create additional opportunities across stakeholder groupings to help them benefit from over 85 years of combined operational experience across both companies.

Read also: Flour Mills’ annual profit hits N28bn, highest in 7 yrs

A merger of proud business legacies

It is not just investors that this deal looks to be good news for. Writing in November, I analysed the deal as a potential game-changer for the export-led growth potential of Nigeria’s food industry in the context of the African Continental Free Trade Area (AfCFTA) agreement. In my analysis, I stated that this acquisition of a strong player in Nigeria’s food processing sector could have an industrial catalyst effect similar to that of Samsung or LG on South Korea’s economy.

While that of course remains to be seen, the company itself certainly appears to see its future in a similar light. In its announcement, repeated reference was made to the acquisition’s potential to create a national food champion for Nigeria, resulting in increased long term job preservation and growth prospects via AfCFTA exports. Confirming what some predicted, the company also revealed that the deal is part of FMN’s overarching backward integration strategy within the food industry, with the ultimate goal of developing the agricultural value chain, improving food security and increasing employment opportunities across Nigeria.

Nodding toward these objectives while commenting on the deal, Boye Olusanya, group managing director, FMN, said: “Our combined brands and businesses will mean an expansive scale of food production for both Nigeria and Africa. Together, Flour Mills of Nigeria and Honeywell Flour Mills will be able to achieve rapid growth while maintaining high-quality products, serving the evolving needs of our consumers. The acquisition will further serve as a catalyst for an even stronger stream of innovation that is focused on local content offerings, enabling our customers across the nation to seamlessly benefit from improved access to a wider product range and a robust pan-Nigerian distribution network.”

Perhaps, most tellingly, hidden away in the announcement was a reference to “creating a long-term, structural cost advantage will help secure the prospects for both current and future employees.” Or as that is otherwise called, ‘Economies of Scale.” The multi-billion naira acquisition of HFMP by FMN can thus accurately be described as a two-pronged attempt to consolidate and drive shareholder value and leverage economies of scale to create a true Nigerian food industry giant with the capacity to conquer the wider African market in the process.

Would you bet against it? I wouldn’t.