Phil Roux, the CEO of Pioneer Food Group, has clearly spelt out that "internationalising" the company is a key element of his longer-term growth strategy for the food company.
A cautionary announcement on March 7 stirred up expectations that a big step towards achieving this goal was imminent. "The company has been approached to explore a material transaction," Pioneer noted.
But it was a doomed deal.
On May 21 Pioneer announced in another release: "Due to the recent sovereign debt rating downgrades in SA and the potential for additional downgrades, the parties have decided to discontinue negotiations at this time."
It made Pioneer the first major victim of ratings downgrades by the big three ratings agencies that followed swiftly in the wake of President Jacob Zuma’s axing of Pravin Gordhan as finance minister on March 30.
S&P was the first to move. It downgraded SA’s sovereign (foreign currency) rating on April 3 to a junk (noninvestment grade) BB+ rating. The agency cut SA’s local currency rating to BBB-, its lowest investment grade rating.
Fitch took an even harsher stance, downgrading SA’s sovereign and local credit ratings to a junk BB+ status.
Moody’s left SA’s sovereign and local credit ratings at Baa2, two notches above junk status. But it has also left SA teetering on the brink, having issued an ominous credit rating warning to the country that will culminate in a rating announcement within about two months.
"Foreign banks probably told Pioneer that, following SA’s ratings downgrades, it was going to cost it a whole lot more to borrow from them," says Warren Jervis, manager of the Old Mutual Mid & Small-Cap Fund, which has a 3% exposure to Pioneer. "It is a setback for Pioneer, which is seeking ways of reducing its high reliance on staple food products."
Essential foods such as maize meal and bread account for about 60% of Pioneer’s revenue and operating profit in a normal year.
Pioneer has not disclosed any details about what the aborted deal involved or where it was located. With the group now in a closed period, Roux, who is normally approachable and forthcoming on the state of play, has decided to stay mum.
Some have speculated that the potential deal could have been in Eastern Europe, a region Roux has expressed strong interest in
entering. A deal in Africa seems unlikely, as Pioneer recently acquired a 49.89% stake in Weetabix East Africa.
Jervis believes the deal would most likely have involved Pioneer buying Weetabix, which is a UK breakfast cereals group, from China’s Shanghai-based Bright Food and a private equity fund. The Chinese group put its 60% stake in Weetabix up for sale in January. It is a view also held by Vunani Securities small and mid-cap company analyst Anthony Clark.
Weetabix would have been a perfect fit for Pioneer, whose Bokomo unit produces SA’s top-selling breakfast cereal, Weet-Bix. Bokomo also has a strong presence in the UK, with two factories producing private-label wheat breakfast biscuits, muesli and granola for grocery chains. It is an operation generating about R1bn in annual revenue.
However, the vendors of Weetabix, which generated revenue of £410m in 2016, did find a buyer in US cereal group Post Holdings. It clinched the deal with a £1.4bn (R24bn) offer.
Pioneer’s market cap is R38.6bn.
Assuming Weetabix was Pioneer’s target, it would have been a tricky deal to fund. Pioneer ended its year to September with cash of R422m and an almost ungeared balance, which gave it the capacity to take on a hefty dose of debt — but not enough to fund a R24bn deal.
"Pioneer would have had to undertake a fat rights issue," says Clark.
A big rights issue would not be simple for Pioneer to undertake, but it would not be impossible.
Zeder, as Pioneer’s largest shareholder, would have been intimately involved, says Clark, and it would not want its 27.1% stake to be heavily diluted.
If Pioneer had been contemplating a R24bn deal, Zeder, which has a market cap of only R12.5bn, would itself have had to undertake a rights issue. "It would probably have amounted to R5bn-R6bn," says Clark.
That would, in turn, have required PSG to cough up R2bn-R2.5bn to maintain its stake in Zeder at 42.4%.
Despite Pioneer’s deal breakdown, Clark remains bullish. The market, he believes, is not fully discounting a big rebound ahead in Pioneer’s bottom line on the back of sharply lower maize and wheat prices.
Jervis is also unfazed. "There is no change in my [positive] view on Pioneer," he says. "There will be other opportunities, I am sure."
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