18 Nov 2012 Rainbow expands beyond chicken with purchase of majority stake in Foodcorp
In a move which came as a surprise to the financial markets, Rainbow Chicken’s CE, Miles Dally (left) has announced its purchase of a 64.2 percent stake in Foodcorp for about R1-billion, a deal which will add popular brands to its basket and greater exposure to the consumer goods sector.
The chicken producer says that the deal with Foodcorp, which owns brands such as YumYum peanut butter, Ouma Rusks, Pieman’s meat pies, Sunbake breads, Nola mayonnaise, Mageu No.1, Bobtail and Dogmor pet food, will help it get closer to the fast-moving consumer goods sector and also grow its brand footprint elsewhere in Africa.
Foodcorp management will retain a 23.9 percent holding in the company and will continue to manage the company’s day-to-day operations. The company sells about 200 million loaves of bread, 280 000 tons of flour, 120 million pies, and 60 million litres of Mageu No.1 a year.
In January last year, Rainbow announced its plans to restructure the company into two operating units, Rainbow and Vector Logistics with the two operating units each being managed by its own board and managing directors.
Chief executive, Miles Dally, says the group is looking to transform the company to a consumer and brand-driven business. “When we restructured the company last year, part of the rationale in doing so was that we could look at growth opportunities. I believe that in order to carry long-term value, we can do it through brands.”
In the past 10 years, the company has been building its consumer brands. Dally says this was notably evident when the Simply Chicken brand hit supermarkets’ shelves. “This brand has become a phenomenal brand and number one in the market.”
The Foodcorp transaction will allow Rainbow Chicken to diversify and enter new attractive food categories with a range of market-leading brands while harnessing synergies and economy of scale benefits.
The deal will enable the group to combine strengths in consumer insight to support product innovation and development. Dally says Rainbow Chicken has done a lot of work increasing its chicken supply to KFC and Chicken Licken.
“We will not move away from our chicken business, the only thing that we have done was that we have broadened our brand basket which will give an opportunity to diversify our earnings.”
Dally agrees that the poultry industry is facing the challenges of rising input costs and cheap imports, saying this deal would present diversified earnings outside of chicken.
The transaction was also an important step for the group to pursue compelling acquisitions of consumer brands in South Africa and sub-Saharan Africa.
Ross Heyns, an equity analyst at Kagiso Asset Management, says Rainbow had been repositioning itself over the last number of years away from the pure commodity side of the poultry business and has been increasing its exposure to value-added products and chicken supplied to quick-serve restaurants.
“While the Foodcorp acquisition is a strategic shift for Rainbow, it is in line with the business’ strategy to try and reduce its exposure to the volatility inherent in the commodity broiler business,” Heyns notes.
Coronation Fund Managers analyst Jason Kombo says although the Foodcorp deal was not expected, Rainbow has communicated its appetite to grow the business.
Kombo says the acquisition would bring further diversification and defensiveness to the group. The integration would be relatively easy as the management of Foodcorp remained in the business and both companies were in the food space.
Source: Business Report, Rainbow Chicken