More than half of Illovo Sugar minority shareholders are in favour of a takeover by Associated British Foods (ABF), the world’s biggest sugar producer, in a R5.6 billion deal that is a boost for investor confidence in South Africa and the continent.
Illovo, Africa’s largest sugar producer, surged 15.43 percent on the JSE on news of the announcement on Friday to close at R23.71 a share as the market warmed to the news.
ABF has owned a 51 percent stake in Illovo since 2006 and will acquire the remaining 48.65 percent stake it does not already own after agreeing to pay R25 a share, representing R5.6bn to be settled in cash.
Smiling all the way
Illovo shareholders will be smiling all the way to the bank after ABF sweetened its original offer of R20 a share following advice from independent experts. The Illovo share price was around R13 before the offer was made.
Kagiso Asset Management, Investec Asset Management and Allan Gray, who manage shares on behalf of their clients, had committed to vote for or recommend their clients vote in favour of the deal.
Dirk van Vlaanderen, an investment analyst at Kagiso Asset Management, said the company supported the offer of R25 a share made by AFB to Illovo’s minority shareholders as it believed this was a fair representation of the attractive medium-term earnings outlook for the business.
“It also offers minorities an opportunity to crystallise an attractive valuation now despite the current earnings weakness and uncertainty due to a severe drought and a very volatile commodity price environment,” he said.
John Thompson, an analyst at Investec Asset Management, on Friday said the R25 a share offer, which had been improved by R5 a share above ABF’s February expression of interest of R20 a share, was better than a 40 percent price premium (versus the 30-day volume weighted average price) taken before the initial take-out announcement.
He forecast that Illovo’s earnings would hit a cyclical low in March as a reflection of the sub-Saharan drought, weak global and European sugar prices combined with adverse currency movements.
“While we are cognisant of the cyclical nature of the business, we believe it will take at least two to three years for the group to again achieve peak profits and cash flows,” he said. “In this light we think the price put on the table by ABF represents a reasonable reflection of worth for Illovo Sugar shareholders, taking into account normalised profits and an adequate take-out premium.”
Speaking from London, John Bason, ABF’s chief financial officer, said on Friday that the acquisition of 100 percent in Illovo was the right thing to do. “The takeover represents a vote of confidence in South Africa and the African continent,” he said.
Bason said the valuation methodology by the independent valuators was a prospective view of Illovo’s profitability. “They took into account Illovo’s future growth prospects, and came up with a value.”
He added: “Shareholders are supportive of the deal, and now that we have reached an agreement with stakeholders, we have to go through a formal process. We have sent out documentation for a meeting of minority shareholders late in May after which the deal becomes signed, sealed and delivered.”
Gavin Dalgleish, Illovo’s chief executive, said the deal signalled a new era for Illovo.
AFB believed Africa was a growing market for sugar, driven by increasing populations and rising incomes.
“Illovo is well positioned to capitalise on this growth, although high global sugar stocks, low world sugar prices and forthcoming changes to the EU sugar regime has created a challenging trading environment,” he said.
The deal is subject to fulfilment of conditions including the approval of the JSE, which is required by September.
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