Two of Nigeria’s largest flour millers, Flour Mills of Nigeria and Honeywell Flour Mills Plc announced a mega deal yesterday that will see the former acquire the latter. According to the press release, Honeywell Group Limited has agreed to sell a 71.69% stake in Honeywell Flour Mills to Flourmills of Nigeria.
It stated, “For the proposed combination of FMN through its affiliates and Honeywell Flour Mills Plc (“HFMP”), a portfolio company of HGL. At a total enterprise value of NGN80 billion, HGL will dispose of a 71.69% stake in HFMP to FMN.”
Enterprise Value includes the debt of the company. Honeywell Flour Mills currently has a market value of N29 billion. The purchase consideration for the deal is yet to be announced. Flour Mills issued a press release informing investors that it will be taking questions about the deal in an earnings call.
While we await further details early indications suggest the trigger for the deal may not be just financial. Analysts who spoke to Nairametrics opine the deal may have been sanctioned by Nigeria’s Central Bank, a common lender to both Honeywell and Flour Mills of Nigeria Plc. The analyst also suggests that it was uncanny for Flour Mills to acquire Honeywell’s business which was in a very difficult state operationally and financially.
The flour milling business is very low margin and thus, provides a limited impetus for such a transaction. Honeywell has also been losing money in its Pasta business which when combined with its noodles business is relatively small compared to its flour mills business. Thus, it makes sense that there were more “political” reasons behind this deal.
According to another source with knowledge of the deal, a plausible reason for Flour Mills’ decision to acquire Honeywell was to avoid potential job losses and other negative economic consequences that may have occurred had the CBN gone ahead to force Honeywell to pay back its loans.
The Central Bank had already shut out bank financing for the company following the removal of Oba Otudeko from the board of FBN Holdings. In response, Honeywell issued a press release informing investors that it was making plans to pay down the loans. It claimed that its First Bank loans are being serviced and that it has paid down the loans by 30% over a two-year period.
“Honeywell Group has continued to meet all its obligations on its facilities with the Bank according to agreed terms and has reduced its exposure by nearly 30% in 2.5 years. The facilities were charged at market rates and the bank continues to earn significant interest therefrom,” they stated.
Subsequently, it reported that it had concluded plans to issue a commercial paper, the opportunity of refinancing and restructuring the company’s debt profile, as the company “moves into a more aggressive phase of growth in its operation.”
Announcing this deal, therefore, suggests that relying on commercial papers to finance the loans may not have fallen through or may have been suspended for now. Without funding, the company may have been more exposed to a dire financial situation. Thus, an expedient way to rescue the company, as well as that of its stakeholders, was to facilitate a friendly acquisition.
Another analyst who spoke on the condition of anonymity opines that this was a win-win situation for everyone involved. Honeywell gets to pay off its loans, giving it time to recover and continue as a going concern. Honeywell also remains a separate entity and continues to exist on the stock exchange.