Long-simmering corporate action in the JSE’s food sector may cook over in the next 18 months, with RCL Foods poised to release a few big flavours. It’s one reason the stock has, after years in the doldrums, been on a tear of late, outperforming peers including AVI, Tiger Brands, Libstar and Rhodes Food.
But RCL, controlled by Remgro, could also be looking for new growth ingredients that might see it snap up smaller food players on the JSE.
RCL is intent on bulking up and growing its grocery and baking segments with its poultry, sugar and logistics operations being separated or dressed up for sale.
At a recent investor presentation, RCL CEO Paul Cruickshank indicated that the separation process for Rainbow Chicken and Vector Logistics, two of the group’s star performers in the year to end-June (albeit off low bases), had progressed well.
“RCL remains committed to our strategic transformation journey … we will continue the managed separation process responsibly while driving growth in our value-added component.”
Clearly major progress has been made at Rainbow Chicken, profitable again after an awful run of losses. “Rainbow is running largely as an autonomous subsidiary of RCL, laying the platform for complete separation in future,” said Cruickshank.
We are not suggesting Rainbow will get JSE wings. There are many options that are available to us in the separation of Rainbow
— Paul Cruickshank
Most market watchers have interpreted this as an admission that Rainbow, now headed by former Country Bird Holdings CEO Marthinus Stander, would be separately listed on the JSE.
But, said Cruickshank: “We are not suggesting Rainbow will get JSE wings. There are many options that are available to us in the separation of Rainbow. I think it would be presumptuous to assume that a separate listing is the only way.”
He also refused to be drawn on a possible time frame for Rainbow’s complete separation from RCL. “The business needs to stand on its own two feet. The balance sheet needs to be factored in. While it is a priority for us, we can’t be sure when it will happen.”
Vector, which is responsible for 100% of Pick n Pay and Shoprite’s frozen product distribution, has been trotted out for a corporate beauty parade. Cruickshank said there had been a “market-sounding” exercise with a select group of investors. “The objective of this process was to test if there was credible interest from prospective acquirers that could further accelerate the growth [of Vector] as an independent player.” Vector’s earnings before interest, tax, depreciation and amortisation (ebitda) was up 18% in the year to end-June, to R335m. This suggests a successful sale could really grease the wheels of RCL’s balance sheet.
On the Selati sugar business, RCL looks slightly less certain on a separation exercise. Whether recent events at controversy-ridden and debt-laden rival Tongaat Hulett have any bearing is not clear. It is worth noting that Selati’s market share had shifted closer to 32% at the end of June this year, from just under 28% at the end of June last year.
Officially, Cruickshank said “sugar remains part of RCL Foods”. In the past financial period, sugar generated R9bn in revenue and R817m in ebitda.
Asked about a perceived about-turn on sugar, he insisted that RCL had not changed its long-term strategy. “All we are saying is that within the parameters in which we are working … the sugar separation will be deprioritised.”
So how is a leaner, meaner RCL going to fatten up its grocery and baking baskets? On the latter, it has made a big investment in its Polokwane bakery, and taken a tilt at Sunshine Bakeries in KwaZulu-Natal.
The options for the grocery basket are more interesting, with market talk suggesting RCL may have already engaged with smaller food listing Libstar.
Libstar, which listed on the JSE in 2018, has remained poorly rated by the market, trading on a forward earnings multiple of under eight. The group managed decent sales growth of 9.6% in the interim period to end-June. While this is below the 10.2% achieved by AVI’s Snackworks business in the past financial year, it is ahead of the 8.8% revenue growth RCL managed in its groceries segment in financial 2022.
Cruickshank said no acquisitions are on the table at this point, but “we are keen to pursue organic and inorganic growth opportunities”.
Still, it does not seem too far-fetched to speculate that RCL might be keen to merge its grocery and baking segments with Libstar. It might even want to cosy up with Brait’s Premier Group.
But it’s not difficult to imagine complications. RCL might be viewed as an acceptable suitor only once plans to delink the poultry business are much clearer. Then there’s the possibility that Remgro, which speaks for about 85% of RCL’s shares, may buy out minority shareholders and delist RCL.
What’s more, any plans by Remgro to merge its Siqalo spreads business (bought from Unilever for R7bn in 2017) with RCL’s grocery segment would be easier to implement in an unlisted environment.
That said, merging Libstar and RCL’s value-added food businesses would create an entity of significant operational scale, with a number of brands that are first and second in their categories. Libstar’s vibrant dairy business, Lancewood, would dovetail well with Siqalo’s best-selling spreads brands including Flora, Stork and Rama — possibly opening up opportunities for brand extensions. Libstar’s Cape Herb & Spices, its specialist baking segment as well as growing private brands and in-house retailer brands, would also fit nicely with RCL’s brand portfolio — which, some wags might feel, still leans heavily on the pet food brands.
Libstar has also built an enviable reputation for brand innovation. At present RCL enjoys dominance only with Nola mayonnaise — which is listed as a brand that generates more than R1bn in sales a year. Libstar could help in building up smaller brand leadership for RCL in Yum Yum peanut butter and Ouma Rusks (where it enjoys a 51.2% market share).
AVI also plays in the higher-end brands segment, and because of its premium market rating and strong balance sheet it could offer a combination of scrip and cash to Libstar shareholders
— Brendon Hubbard
ClucasGray portfolio manager Brendon Hubbard believes Libstar is a prime takeover target. “It’s the cheapest of the bunch of JSE food producers, and offers a high-end product range. Unlike Tiger Brands and Premier Group, which have a large ‘commodity element’, Libstar has a higher-quality basket of brands, but trades at a lower multiple on the JSE.”
Hubbard has also thrown AVI into the ring as a potential suitor. “AVI also plays in the higher-end brands segment, and because of its premium market rating and strong balance sheet it could offer a combination of scrip and cash to Libstar shareholders.”
Libstar’s “for sale” status is enhanced by the fact that private equity giant Actis (which bought the group’s previous private equity partner) is overdue to exit the food business.
But a merger between RCL and Libstar — funded by an issue of the latter’s paper — would probably not suit the private equity investors, who would no doubt be looking to cash out. The FM doubts that Remgro, which has endured a long grind with Rainbow/RCL, would want to put more money into funding a cash buyout of Libstar, or any other decent-sized food sector contender.
Then there are the suggestions that Remgro buy Libstar with a view to merging it, along with Siqalo, into RCL.
Others are more sceptical about an RCL/Libstar tie-up. One portfolio manager, who asked not to be named, says: “A group buying Libstar might only want three or four of the bigger brands. What does it do with the rest?” Plenty to chew on then.
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