On September 29, 1960, as Nigerians prepared to usher in a new era of political independence, one free of the shackles of British colonial rule, Nigeria’s pioneer wheat miller, Flour Mills of Nigeria plc (FMN), was incorporated. Over the years, FMN has become synonymous with the food basket that feeds the nation.,. Sixty-one years later, FMN is set to record yet another feat with the proposed acquisition of a 71.69% stake in Honeywell Flour Mills plc (HFMP).
This will see Honeywell Group Limited (HGL) relinquish its majority stake in HFMP to FMN. A joint announcement by both entities on November 22, 2021, confirmed that an agreement was signed for a proposed combination of business operations, an agreement which is still subject to regulatory approvals.
FMN also acquired 5.06% First Bank of Nigeria equity shares in HFMP, resulting in a total shareholding interest of 76.75% post-acquisition. At the completion of the transaction, valued at a total enterprise value of N80 billion, FMN will emerge as the majority shareholder in HFMP with operational and managerial control.
With over 23 subsidiaries, 17 modern state-of-the-art facilities and production capacity that cut across sugar production, grain milling, edible oil, starches, agri-inputs, and animal nutrition, FMN is the largest flour miller in Nigeria. It has grown from a single milling plant in Apapa in the 1960s to a leading food and agro-allied group with footprints across 12 states in Nigeria. It employs over 14,000 men and women (directly and indirectly).
FMN continues to deliver best-in-class double-digit growth across major performance indices driven primarily by a combination of strong operating performance in the food segment and continuous improvement in the Agro-allied and Support segments. Notwithstanding the lingering economic impact of the Covid-19 pandemic, its 2021 full-year financials showed that Profit Before Tax (PBT) recorded a 61% increase from N17.5bn in 2020 to N28.2bn in 2021 primarily aided by an impressive 21% growth in Revenue from N394.9bn in 2020 to N535.9bn in 2021.
The company’s Total Assets closed at N380.3bn in 2021, a 21% increase from N314.3bn in 2020 as it continues to improve the structure of the balance sheet. Its sound treasury management informed the issuance of N30 bn Corporate Bond with a tenor of 5 and 7 years priced at 5.50% and 6.25% respectively used to replace expensive short-term facilities. This successfully altered its debt mix from 39%:61% in HY 2021 to 18%:82% in HY 2022 for short-term to long-term debts respectively. Cost containment remains a part of the company’s strategy as operating expenses inched up by 12% from N22.9bn in 2020 to N25.7bn in 2021 well below the inflation rate of 15.99% as of October 2021.
Originally registered as Gateway Honeywell Flour Mill Limited in 1983, Honeywell Flour Mill plc has evolved to become a major flour milling company in Nigeria with a wheat storage capacity of 72,900 MT and a total installed capacity of 2,610 mtpd. It employs over 830 permanent employees and about 1,000 people indirectly. Its most recent financials for 2021 revealed that revenue grew by 36% from N80.5bn in 2020 to N109.6bn in 2021. PBT also recorded a 24% growth from N1.3bn in 2020 to N1.6bn in 2021.
Despite the raging effect of elevated inflation and currency depreciation, HFM successfully reduced cost as it recorded a 4% decline in operating expenses from N8.5bn in 2020 to N8.1bn in 2021. Total Assets also increased by 4% to N147.4bn in 2021 from N142.3bn.
FMN’s track record of executing mergers within the Nigerian food sub-sector makes it most suited for such transactions. In 2007, FMN acquired 51% shares of Nigerian Eagle Flour Mills Limited which effectively vested management powers on FMN. This acquisition contributed positively to the expansion of the FMN brand in the Southwestern region of the country and also helped to scale its B2C product offerings.
FMN continuously explores opportunities for strategic partnerships to further enhance its competitive positioning in Nigeria and eventually extend its businesses beyond the borders of Nigeria. Notwithstanding its acquisition efforts, its strategy hinges on organic growth through product innovation and market transformation while improving operational efficiency.
This merger will see FMN use its wide distribution network to increase the reach of the vast range of product portfolios of both companies including staple foods, greenfield backward integration in sugar production, starches edible oil, and margarine as well as sorghum.
This would create a stronger combined business with enhanced growth prospects and job creation capabilities. The combined entity will have access to a broader opportunity and play a critical role in Nigeria’s food production and security. Reacting to the transaction, the Group Managing Director of FMN, Mr. Boye Olusanya said “The proposed transaction is aligned with our vision not only to be an industry leader but a national champion for Nigeria. We believe that this will create an opportunity to combine the unique talents of two robust businesses”.
This transaction seeks to create new regional opportunities in line with the continental growth aspirations of the entities.
In the wake of the ratification of the African Continental Free Trade Area (AfCFTA) agreement and the commencement of trading under the agreement, there’s an opportunity for the combined entity to maximize the tariff elimination and single market for goods and services provisions of the agreement, amongst the 54 countries in the region.
The AfCFTA seems to liberalize trade amongst member nations and open up the entire continent for exports for the combined entity’s products as well as enable access to the much-needed infrastructure that the country lacks. Sustained investment in the business will see the combined entity become a critical provider of the continent’s food needs.
There exists a huge potential for massive job creation through direct employment and backward integration, increased taxable revenue for the government, improved balance of trade, enhanced foreign exchange earnings, and standardized products. In line with the Backward Integration Policy (BIP) of the federal government, the combined entity will lead the way in steering the use of local content and improve the economic landscape of the country.
With over 85 years of combined track record of developing the manufacturing sector in Nigeria, the combined entity will maximize potential synergies of over N1 trillion in revenue as well as cost and balance sheet synergy opportunities over the short to medium term.
These synergies will result in a stronger stream of innovation and a diverse range of complementary product offerings, streamlined supply chain and operations through economies of scale, and technology-driven logistics to further drive down operating expenses. The potential for improved cash and risk management, access to cheaper funds and reduced cost of funds are some additional sweeteners of this deal. The robust expertise and experience of the Board and management of both entities will be a plus for the business going forward.
Shareholders seem to have reacted positively to the announcement of the merger as the shares of HFMP increased by 10% a day after the deal announcement and spiked by 165% on a year-to-date basis. Similarly, the shares of FMN recorded a year-to-date growth of 8%.
The press release for the deal revealed FMN’s commitment to treat minority shareholders fairly and retain the listing of HFM on the NGX for the foreseeable future. I believe that a more prudent approach would be to make the minority shareholders an offer and acquire the remaining 23.25% shares and subsequently, delist HFM from the NGX. This, I believe, will promote a seamless integration, drive growth for the combined entity and accelerate capital appreciation for shareholders.
A good case in point is the Access Bank – Diamond bank Merger of 2019 which saw diamond bank absorbed into Access bank, as Diamond Bank shareholders received N3.13 per share, comprising N1.00 per share in cash and the allotment of two (2) new Access Bank ordinary shares for every seven (7) Diamond Bank ordinary shares held at the implementation date. Consequently, the shares and Global Depository Receipts (GDRs) of Diamond Bank on the NSE (now NGX) and the LSE were delisted after the merger became effective.
Consolidation in the global food industry has been enabled by a number of mergers and acquisitions in recent years. Increasingly, the larger companies are determined to increase market share, and this has seen the most dominant corporations pursue disruptive acquisitions in areas that appeal to consumer preference for healthy eating (better-for-you category).
Some of such transactions include PepsiCo’s acquisition of Better-For-You brands; makers of PopCornera and Rice Rounds in December 2019, Coca-Cola’s acquisition of Italian mineral water and sparkling beverage company; Lurisia in September 2019. It might be early days to say whether or not these transactions will translate into increased value for the acquiring companies, but it does give a sense of how the players in the global food industry are looking to mergers and acquisitions for sustainable growth, value creation and market dominance.
The incorporation of sustainable practices is increasingly becoming a significant part of every forward-thinking company’s strategy as investors continue to demand environment-friendliness and strong corporate governance practices from companies.
Following FMN’s commendable strides in the areas of Environmental, Social, and Governance (ESG) policy, the combined entity stands a stronger chance of enhancing the sustainability status of the food industry specifically, and the Nigerian market in general.
FMN recently became a signatory to the United Nations Global Impact which underscores its commitment to the United Nations Sustainable Development Goals (SDGs). For context, the company launched its first stand-alone sustainability report which consolidates its ESG efforts. Despite the racial, ethnic and multi-cultural diversity of the Board, FMN has focused on improving gender representation on the board which increased from 7% in 2019 to 13% in 2021.
According to a Fitch Solutions Industry Forecast report, food spend is expected to grow by 15% y-o-y in 2022 from N37.1trillion in 2021 as consumers prioritise essentials amidst elevated inflation which would drive food prices northwards. Specifically, food sale is forecasted to reach N42.7 trillion in 2022 and accelerate further to N61.6trillion by 2025. Pasta spend is expected to grow by 11% to N383bn in 2022, and N575bn by 2025 from N344bn in 2021. Although data on the flour milling industry is limited, available data from Euromonitor suggests that FMN (Golden Penny) and HFM’s market share of pasta stood at 49% and 13% respectively. For the Noodles sub-sector, HFN’s market share stood at 6.6% and 3.4% for FMN.
In the flour milling business, FMN is presently the second largest miller with flour operations of about 3.8 million metric tonnes per annum(mmtpa), while HFM operations capacity is somewhere around 0.835 mmtpa. The combined entity will undoubtedly become a clear leader in the flour, noodles and pasta sub-sectors with an opportunity to dominate the entire food industry. I think the combined entity has an opportunity to evolve beyond FMN’s laudable goal of feeding the nation, but also become the single largest food brand in Africa.
Uche is an independent investment analyst in Lagos