- £1.4 billion CP Kelco takeover agreed
- ‘Significant’ synergies expected
- £215 million share buyback begins
Global ingredients group Tate & Lyle (TATE) has agreed to buy US-based ‘mouthfeel’ specialist CP Kelco from Huber for $1.8 billion (£1.4 billion) with the food producer hungry to accelerate growth in its specialty food and beverage business.
The cash and shares transaction should sweeten Tate & Lyle’s margins over the next few years and makes strategic sense, since it creates a market leader in ‘mouthfeel’ - literally the way food or drink feels in the mouth - and the two ingredients firms share the same client base.
However, Tate & Lyle shares slipped 3.5% lower to 653.5p on the news with the scale of the deal making some investors nervous, since large acquisitions have a nasty habit of destroying rather than creating shareholder value.
SWEET ON CP KELCO
CP Kelco is a sizeable player in pectin, speciality gums and other nature-based ingredients that generates half of its sales in the US and the balance from emerging markets and Europe.
The company’s selling shareholder Hubert will get a 16% stake in Tate & Lyle and receive two seats on the board of the FTSE 250 group.
While some investors may be concerned over integration risks, the acquisition is a complementary one for Tate & Lyle, since CP Kelco sells to the same group of clients in the main.
Tate & Lyle says the deal will enable it to grow at the high end of management’s 4% to 6% like-for-like growth range and generate at least $50 million in synergies in the first two years.
The food producer said the acquisition expands its offering in a $19 billion and fast-growing speciality food and beverage ingredients addressable market and will be ‘accretive to adjusted earnings per share, including cost synergies only, in the second full financial year following completion, and strongly accretive thereafter’.
WHAT DID THE CEO SAY?
Over the past six years, Tate & Lyle has executed a major strategic transformation to become a growth-focused speciality food and beverage solutions business, which was completed with the announcement on 23 May 2024 of the proposed sale of its remaining 49.7% interest in Primient.
Following completion of the CP Kelco acquisition, cash-generative Tate & Lyle insisted it will remain within its long-term target leverage range ‘with the capacity and flexibility for further investment’.
The recently announced £215 million share buyback, which was due to follow completion of Primient stake sale, has been pulled forward to today.
‘Following on from the announcement of the proposed sale of our remaining interest in Primient last month, the proposed combination with CP Kelco represents a significant acceleration of our growth-focused strategy,’ commented CEO Nick Hampton.
‘It creates a leading, global speciality food and beverage solutions business, ideally placed to benefit from the structural trends towards more plant-based, clean-label and sustainable ingredients and solutions. The growth potential of the proposed combined business is significant and we look forward to the future with confidence and excitement.’
THE EXPERT’S VIEW
AJ Bell investment director Russ Mould highlighted that the CP Kelco deal is being funded through a mixture of debt and existing cash, so there is ‘the potential for some strain on Tate & Lyle’s balance sheet. However, the decision to press ahead with a previously announced share buyback programme is a sign of confidence on this front.
‘A lot will ride on the company’s ability to deliver the cost savings from combining operations and the promised improvements in revenue growth and margins,’ said Mould.
‘Often a management team overestimates what they can do on this front and ends up disappointing investors. At least Tate & Lyle is buying a business it knows well, having collaborated with it over a long period. That might reduce the risk that it discovers some skeletons in the cupboard when it takes charge.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Martin Gamble) own shares in AJ Bell.
