Olam has offered N130 billion to acquire Dangote Flour Mills, Nigeria’s third-largest miller by market capacity, in a deal that could transform the Singaporean company into the biggest flour player in Africa’s biggest economy, with 43 percent market share.
Flour Mills of Nigeria (FMN) has remained the market leader over the years with a 32 percent share, with Olam squaring 24 percent, and Dangote Flour having 19 percent share. Chagoury Group (11 percent) and Honeywell (10 percent) come fourth and fifth in market ranking, while others share the remaining about 4 percent, according to a 2016 research report by KPMG on Nigeria’s flour milling industry.
But a potential 43 percent (24 plus 19) market share by capacity is in the offing when the deal between Olam and Dangote is completed.
“I think it is a business strategy by Dangote,” Muda Yusuf, director-general, Lagos Chamber of Commerce and Industry (LCCI), said in a telephone interview.
“I suspect Dangote wants to concentrate on areas of competitive strength and consolidate there. They would have done their numbers and found the decision right,” Yusuf said.
In early 2016, Olam acquired BUA Group’s flour business in a deal worth $275 million. Earlier in 2010, Olam had acquired Crown Flour Mills (CFM) in Nigeria and consequently expanded its capacity and set up milling operations in Ghana, Senegal and Cameroon. Dangote Flour’s current market capitalisation is N59 billion.
Thabo Mabe, Dangote’s executive director, said on Tuesday that the company is debt-free, adding that while the offer is still being deliberated on by the concerned parties, it will continually be modified to suit both parties.
“This consideration will be adjusted for networking capital and net debt as of 31st March, 2019 or any other later date that may be agreed by Olam and the board of DFM to arrive at the final price payable to equity shareholders. The final price to be paid to the shareholders of the company would be adjusted downwards to exclude shares held by Olam through its subsidiaries,” he said in a statement to the Nigerian Stock Exchange.
Olam, through its subsidiary, currently owns 5 million units of shares in Dangote Flour Mills.
Analysts say Africa’s richest man Aliko Dangote is selling the subsidiary because he wants to exit an industry he cannot have market leadership, and not because the company is underperforming or under serious financial threat.
“If you are selling a business within the space of seven years, it then means you want to exit. It is obvious they do not want to be part of a business they do not have market leadership,” said Ifedayo Olowoporoku, consumer goods research analyst at Vetiva Management Ltd.
“Since Olam is already a private company, it could delist the miller if it eventually buys it,” said Olowoporoku.
Dangote Flour Mills has been recording double-digit growth in earnings since 2016, a year after Aliko Dangote repurchased it from South Africa food giants, Tiger Brand Limited.
But analysis of the fourth-quarter financial statement of the consumer goods giant showed it capitulated to a tough and unpredictable macroeconomic environment as it recorded its first loss in four years.
For the year ended December 2018, Dangote Flour Mills posted a loss of N1.15 billion, from a profit of N15.13 billion the previous year.
The company’s gross profit margin fell to 9.11 percent in December 2018, from 29.62 percent the previous year, while gross profit fell by 65.43 percent to N10.24 billion as at December 2018.
The debt to equity (D/E) ratio increased to 187.57 percent in December 2018, from 185.89 percent the previous year.
Low consumer purchasing power, decrepit infrastructure and multiple taxation have hindered companies in Africa’s largest economy from breaking even while margins have been under pressure.
While GDP expanded by 1.9 percent in 2018, it is still below the long-term growth rate of the economy at 7.60 percent.
Analysts say consumer goods firms will continue to falter so long as there is no improvement in the living standard of Nigerians, with 87 million poor people and unemployment rate of 23 percent, according to the National Bureau of Statistics (NBS).
Dangote Flour Mills’ shares traded at N11.75 on the floor of the Nigerian Stock Exchange on Tuesday with a one-year return of negative 11.99 percent.
Gbolahan Ologunro, research analyst at CSL Stockbrokers, said the move by Dangote to divest from the flour mills could be a financing strategy for the ongoing Dangote Refinery and Petrochemicals.
“It is possible that the owner prefers to finance the ongoing refinery through equity rather than raising debt,” he said.
According to Gbolahan, it is going to be a win-win situation for the shareholders of Dangote Flour Mills.
This translates to a payment of N26.00 per share, subject to adjustments for networking capital and net debt as at March 31, 2019. The offer comes at a premium of NGN15.30 per share based on its closing price of N10.70 as at 18 April, 2019. The transaction is to be executed through a Scheme of Arrangement and is subject to the approval of the Federal High Court, shareholders, regulators, among others.
Ayodeji Ebo, managing director, Afrinvest Securities, stated that flour millers have struggled with smuggling and infrastructure deficit, especially in the transportation of products through the Apapa ports.
“But this acquisition by Olam industries will represent a forward integration which will mark a positive change in the sector,” he said. “Furthermore, for the existing shareholders, this will provide a platform for positive yields.”
ODINAKA ANUDU, BALA AUGIE, OLUFIKAYO OWOEYE & GBEMI FAMINU
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