By the time this publication hits the shops, proceeds from SA’s largest inbound food acquisition will have been paid out to shareholders.
Then some fun could begin.
In mid-2019 the world’s second-largest soft drinks company, US-listed PepsiCo — owners of the drinks brands but also of Quaker Oats, Gatorade, Doritos and Frito-Lay chips — made a R25.4bn offer to buy SA’s second-largest foods company, Pioneer Foods.
The offer was at R110.00 a share, a 56.5% premium to the prevailing 30-day volume weighted average share price.
The size of this transaction makes it comparable to US private equity firm Bain’s purchase of retail chain Edcon for R25bn in 2007 and of US retail giant WalMart’s acquisition of a R16.5bn stake in Massmart in 2010. For Bain and Massmart both turned into disasters.
Let’s hope history does not repeat itself.
PepsiCo is no stranger to this country. The company’s efforts through local operators to roll out the Pepsi, Mountain Dew, 7UP and other carbonated soft drinks brands has passed though many hands in the past quarter century and pretty much all resulted in the business going flat.
Pioneer Foods had the rights to PepsiCo’s soft drinks brands for years but after mounting losses exited the brands in 2014.
The current owners of the rights to market and bottle Pepsi and the allied brands in SA are Ethos and Nedbank Private Equity, which acquired SoftBev in 2018.
PepsiCo has been in the snacks business in SA since 1995, when it purchased a 50% stake in the Simba chips business from Foodcorp. It bought out the company in 1999, so it has a long understanding of the consumer market in SA.
Now, what about the R25.4bn that the deal brings into SA? That’s where it gets interesting.
In early 2017, PepsiCo allegedly offered R200 a share for Pioneer Foods. That collapsed, but PepsiCo came back two years later with a lower offer, as Pioneer’s prospects had weakened with the economy in the intervening two years — and 52% of Pioneer shareholders supported the buyout deal at R110 a share in July 2019.
The largest shareholder is PSG Group-aligned agricultural business Zeder Investments, which owned a 28.23% stake in Pioneer Foods; it was "kingmaker" in the deal.
Zeder stood to pocket R6.4bn in cash. It has stated that after its pays down debt (R1.6bn) between R4.25bn and R4.75bn will be paid out as a special dividend to shareholders.
Given the Zeder ownership structure, parent PSG Group gets about R2bn in cold, hard cash.
What’s left then within Zeder is some cash (R350m) and a bag of mixed agri-assets that few understand or will want to understand. After the cash payout, the Zeder "rump" will have Zeder theoretically trading around 170c a share and having a market value of R2.9bn (it was trading at 434c a share at the time of writing). The debt-free remaining portfolio assets should be worth R6bn, or 350c a share. Thus the discount is theoretically 51%.
Not many will want to bother with Zeder after Pioneer’s exit and the cash payout. Only agri-analysts like me will track Zeder. I expect the market to disregard the counter, and the discount to remain stubbornly high. That could be an opportunity as a special situation.
Here’s an idea. Why doesn’t PSG Group use the cash it gets from Zeder to buy more shares in Zeder — it now owns 43.8% — or even buy it out, hide the assets away from uninterested market eyes and reap the longer-term rewards that agricultural assets demand?
After the cash distribution and the implied vast 51% discount to the sum of the parts, Zeder may be the smart play in the sector for a buyout or some form of discount-narrowing strategy by management. The firm needs a makeover, as it’s pretty tired as an investment vehicle.
One to watch closely.
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