Flour millers consolidate as market fundamentals favour players

A consolidation is taking place in the flour-milling industry as demography continues to drive the market for the product.

But squeezing consumer wallets are also hurting sales as poverty deepens among consumers. Poverty rate is almost 50 percent while unemployment is 23.1 percent, according to the National Bureau of Statistics.

Only consumer firms sensitive to prices are thriving, but investments have continued despite foreign exchange exposure.

Most flour millers import wheat and are exposed to FX, but many are seeking local alternatives.

Olam recently offered N130 billion to acquire Dangote Flour Mills, Nigeria’s third largest miller by market capacity,  in a deal seen transforming the Singaporean company into the biggest flour player in Africa’s biggest economy, with 43 percent 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.  Charghoury Group (11 percent) and Honeywell (10 percent) come fourth and fifth in market ranking  while others share the rest four percent, according to a 2016 research report by KPMG on Nigeria’s flour milling industry.

But the game may have changed after Olam’s offer to Dangote. A potential 43 percent ( 24+19) market share by capacity is in offing when the deal between Olam and Dangote is completed.

Market analysts foresee economies of scale for Olam and a scramble for higher share of the market by Flour Mills of Nigeria and others.

Muda Yusuf, director-general of Lagos Chamber of Commerce and Industry (LCCI), said that the offer by Olam could be Dangote’s a business strategy.

“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.

John Anua, a US-based market analyst, told BusinessDay that Olam’s investment shows untapped opportunity and Olam’s confidence in the Nigerian economy.

“What I see is a consolidation that will help firms to achieve economies of scale,” he said.

In early 2016, Olam acquired BUA Group’s flour in a deal worth $275million. 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’s current market capitalisation is N59 billion.

Thabo Mabe, Dangote’s executive director, said after the offer that the company was debt-free, adding that while the offer was still being deliberated on by the concerned parties, it would continually be modified to suit everyone.

Dangote Flour Mills recorded double digit growth in earnings since 2016— a year after Aliko Dangote repurchased it from South Africa food giants, Tiger Brand Limited.

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.

Analysts say consumer goods firms will continue to falter so long as there is no improvement in the living standard of Nigerians, with 98 million extremely poor people and unemployment rate of 23 percent, according to the National Bureau of Statistics (NBS).

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.

Ayodeji Ebo, managing director of Afrinvest Securities, said after the deal that flour millers had 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 conceded.

“Furthermore, for the existing shareholders, this will provide a platform for positive yields,” he added.

ODINAKA ANUDU