Tate & Lyle has agreed to buy CP Kelco, a leading provider of pectin, speciality gums and other nature-based ingredients. The implied cost of around £1.4bn will be paid for with £905mn in cash and two tranches of new ordinary shares, 75mn up front and a further 10mn subject to performance targets.
The acquisition is expected to push revenue growth toward the top end of the 4-6% target and save around £40mn in annual costs two years after completion.
There will be no change to the capital allocation or dividend policies. The planned £215mn buyback will start today. The deal is expected to complete toward the end of 2024.
The shares fell 2.1% following the announcement.
Our view
Tate & Lyle’s transformation into a fully fledged speciality food and beverage solutions business is complete. The sale of its Primient joint venture was the final hurdle and the acquisition of CP Kelco is a further demonstration of management’s commitment to the new strategy. We like the move, and it adds to our confidence that medium term revenue targets can be met.
Recent trading has been a little soft. Tate’s continued to see reduced demand for some end products and persistent de-stocking by customers. We’re also monitoring the potential impact from new weight loss drugs, though we remain sceptical about whether these will move the dial.
On a positive note, the Group's making good on its promise to streamline operations and focus on the most profitable parts of the business. The margin benefits are coming through, and an underlying cash profit (EBITDA) margin of 19.9% was a step up from last year.
The core business is in food & beverage solutions, with smaller units focusing on European sweeteners and the sugar alternative Sucralose. But it's the core business, specifically solution-based partnerships, that we see as a key growth driver. This is where it partners with customers to create bespoke solutions to their dietary and nutritional needs. Deeper relationships and closer ties add an element of stickiness to the business, and enable Tate & Lyle to leverage its technical expertise.
The sale of Tate’s remaining stake in the Primient joint venture is important. It was the last remnant of the legacy business and an important hurdle to clear. From here acquisitions and expansions are a key part of the plan, and we've seen a ramp-up in internal and external investment to drive the next era of growth.
Cash flows are also strong enough to support some well-timed debt repurchases, bringing down interest costs, which is helping to support the margin expansion. The balance sheet is strong enough without these actions, but it's refreshing to see some prudent capital allocation supporting longer-term goals.
The renewed focus on speciality ingredients and solutions, a strong management team, and a balance sheet with enough firepower to expand all give scope for optimism. The valuation, roughly 12 times expected earnings, isn't too demanding. In the short term, volume challenges and the potential impacts from new weight loss drugs continue to loom overhead. It'll take some knockout performances for sentiment to shift.
Environmental, social and governance (ESG) risk
The food and beverage industry tends to be medium-risk in terms of ESG though some segments like agriculture, tobacco and spirits fall into the high-risk category. Product governance is a key risk industry wide especially in areas with strict quality and safety requirements. Labour relations and supply chain management are also industry wide risks, with other issues varying by sub-sector.
According to Sustainalytics, Tate & Lyle’s management of material ESG issues is strong.
Tate & Lyle ESG reporting doesn't adhere to leading standards, but they have assigned board-level responsibility for overseeing ESG issues. There’s a robust environmental policy that ties executive compensation directly to ESG performance targets. Scope 1,2 and 3 emissions data is disclosed, and the group’s carbon intensity has been on a declining trend for several years. Additionally, the whistleblower program is considered very strong.
Tate & Lyle key facts
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