Tiger Brands wary of African assets after Nigerian misadventure
bdlive.co.za - May 26th 2014, 10:26
It's investment in Nigeria had taught Tiger Brands not to be hasty when pursuing growth opportunities in Africa, group CE, Peter Matlare, said on Wednesday as the company released its interim results.
Tiger Brands had learnt "important lessons" from its ill-starred acquisition of a majority stake in Dangote Flour Mills. The group is writing off more than half of its initial R1.5bn investment in Dangote, which was made in October 2012.
The write-down follows substantial losses since the Nigerian food business was acquired. The losses have been partly attributed to an oversupplied market.
Tiger Brands bought a 63.4% stake in Dangote to have a business of scale in Africa’s biggest economy, a move that saw it pay a large premium to the book value of the business.
Mr Matlare said the Dangote deal, Tiger’s largest as a consumer goods business, had forced executives to be more "rigorous" on other deals. Tiger had called off an acquisition of Kenyan milling and baking businesses after discovering parts of the Kenyan operations it was unhappy with.
He conceded that Tiger Brands had "underestimated" the complexities of fixing and running a business of Dangote’s size in Nigeria. "We have learnt some important lessons. We are lucky in having a very strong partner in Mr (Aliko) Dangote. He’s been supportive — and hopefully we will get it right," Mr Matlare said.
In future, Tiger Brands would "make sure that whatever we look to acquire meets our standards" and that "we don’t end up paying for stuff we have to then impair".
As part of the turnaround plan for Dangote, two of its four mills will be mothballed. One will do so in July, the second early next year.
Further, Tiger Brands was planning to launch new higher-margin brands by the end of the year and these would require "significant marketing spend", Mr Matlare said. Tiger Brands would also target a broader geographic footprint for its products in Nigeria, including in the southeast and east.
Most of Tiger Brands’ products in Nigeria were sold in the northeast, which was affected by continuing "security challenges".
Mr Matlare cautioned that the turnaround of Dangote would not happen quickly, but the company still gave Tiger Brands the platform for growth in Nigeria, he said.
Greg Cort, an analyst at Old Mutual Investment ’s Electus boutique, said the impairment of Dangote, which was announced last week, "seems surprising given the cost at which these assets were purchased".
Vestact equities analyst, Byron Lotter, said the impairment meant Tiger Brands was writing off the entire premium paid for Dangote. But while Tiger Brands had paid a premium for a business in decline, it was worth remembering that when MTN bought its business in Nigeria, now its largest and most valuable unit, the market said it had overpaid for the asset.
"I am not saying that this will turn out as well, but the numbers are certainly there," Mr Lotter said. "I still back management to turn this around in due course. These things take time, especially in Africa."
In the six months to March, Tiger Brands reported sales growth of 11% to R14.9bn from a year ago. The gross margin narrowed 0.9 of a percentage point to 30.9% because of the effect of the weak rand on input costs. The rising costs could not be fully recovered through pricing in the South African operations. Attributable profit fell 52% to R631.9m.From DFM Publishers (Pty) Ltd
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