Tiger learns from mistakes in Nigeria
bdlive.co.za - Dec 9th 2014, 09:52
Tiger Brands has not been put off buying businesses of scale and its rest-of-Africa strategy has been unaffected by its bad experience in Nigeria, CEO Peter Matlare says.
Tiger’s acquisition of Dangote Flour Mills (DFM) in Nigeria two years ago for a "full price" has proved a major drag on the group’s earnings, with impairments and losses from Nigeria featuring prominently in Tiger’s results since.
Of its initial R1.5bn investment for a majority stake in DFM, which was made to build scale in the country and serve as a platform for other opportunities, Tiger has had to write off the entire R849m premium paid for the business as well as a further R105m against the value of DFM’s assets.
It has mothballed two of its five flourmills and is operating at just 40% production capacity in flour.
Tiger has also closed a noodles factory in Nigeria.
Mr Matlare says the experience "has heightened our desire to make sure we don’t drop catches. DFM matters big time in our lives: reputationally it’s important for us, strategically it’s very important".
"Some of the lessons must carry over to any other deal, whether in SA, Nigeria, Kenya, Ethiopia, Ghana, Cameroon — any deal that we do, if we’ve not taken certain lessons from DFM then we’ve done our shareholders a disservice."
On future deals, Mr Matlare says Tiger will send larger management teams, earlier on, to its new business. It will also "take the keys" of its takeover targets from day one in order to establish certainty — something it had not done in the DFM deal due to the terms of the agreement.
Nevertheless, he says, while the company has a number of lessons to draw from the misadventure, it has not been scared off doing other major deals across Africa. "We continue to look for deals; we’ve got a strong balance sheet."
Phil Roux, a former Tiger executive who is now CEO of competitor Pioneer Foods, says his company will only look for small deals as it gradually builds its Africa business — a more conservative approach than Tiger’s.
Mr Matlare concedes that Tiger got it wrong when it came to assessing the competition in Nigeria as well as the country’s "commercial architecture" — or ways of doing business.
In an effort to cut costs from a bloated business, "we took out 1,200 heads within six months of being there — those may just have been some lower level people, but we could also have lost some trading intellectual property in there. There are several of those lessons we learnt along the way," he says, adding that this also includes a norm to provide credit to wholesalers and distributors.
Mr Matlare says the market’s "complexities" and unexpected challenges have included two staff kidnappings, although the group has since been left alone after "people realised they can’t extort money from us".
"We had hardly been there for a couple of months when the first person was kidnapped who worked for us," he says, praising Tiger’s local partners for helping to resolve the situations, without disclosing further details.
DFM’s turnaround plan includes work to improve wheat extraction rates, a process that involves blending wheat from new sources while also improving the efficiencies of its milling plants. It now sources wheat from two origins and plans to invest in new silos, which will enable it to source from a third.
The group is also looking at ways to improve route-to-market capabilities, which could include outsourcing its logistics functions at some point.
In SA, bar its bakeries business, Tiger outsources 90% of its logistics, Mr Matlare says.
"Imperial (a Tiger logistics partner in SA) did a deal with one of our other partners in Nigeria and logic says that perhaps there’s an opportunity for them to be able to do this for us there."
Meanwhile, Tiger has been focusing on improving the quality and consistency of DFM’s products. "We are beginning to see the benefits of that work come through in DFM."
The group has also been "investing in people" by sending top and middle managers from Nigeria to its academies in SA. "And in this new year you will see investments in our brands," Mr Matlare says, adding that products and structures had to be fixed before Tiger could invest significantly in marketing its products.
To drive capacity utilisation and grow revenues, Tiger is looking to grow DFM’s presence outside of northern Nigeria, where it has historically been focused. "We are still rolling out the new penetration strategies in terms of the other areas in the country."
It is also looking at ways to restructure DFM’s debt, while under the Tiger Brands banner, it plans to launch a new pasta brand and a new breakfast cereal offering next year. These will carry a "significant marketing budget".
Mr Matlare expects DFM to become profitable in 2016. While Tiger has been criticised for a lack of due diligence on DFM’s assets, the group has strong technical capabilities to assess plants and "actually we knew what we were getting".
He calls Tiger’s business in Cameroon its "poster child". The group pursued a business there in relative disrepair more than four years ago and turned it into a strong operation. Tiger enjoyed similar successes in Kenya over the same period, while its Ethiopian unit has done well until a minor stumble recently.
As is the case with Pioneer, Tiger has been reporting strong growth in exports across the region. However, Mr Matlare says the export model "is not one that will sustain into the long term".
"You’ve got to use it to build up critical mass in-country and then start putting down assets."
This could include a regional approach, where Kenya or Ethiopia could service East Africa, Cameroon could supply central Africa, and Nigeria could supply West Africa.
Tiger’s search for African growth is partly to identify new opportunities and partly because of less promising prospects in SA, he says.
"You’ve got to batten down the hatches because it’s going to be harder for longer in SA," he says, adding that volume growth in SA comes largely from stealing market share rather than a growing pie.
The issues before the acquisition were poor management; poor product quality; overcapacity in the Nigerian flour-milling market (ongoing); and lack of strong branded consumer grain products that command good margins, Kagiso Asset Management investment analyst Victor Seanie says.
But, he says, "the gain (for the group in Nigeria) is a foothold in what will become the continent’s largest consumer market".From DFM Publishers (Pty) Ltd
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