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Danisco to split or sell sugar division this year

By Jess Halliday , 04-Mar-2008

Danisco is bringing forward plans to spin-off or sell-off its sugar operations to the end of this year due to a better outlook for the European sugar industry.

The Danish company announced its intention to split off its sugar division from food ingredients in August 2007, but in early September the board voted against the action on the grounds that the sugar industry was still in disarray following the implementation of the new sugar regime in 2006.

 

 

 

It expected to revisit the spin-off plan one or two years down the line, when it anticipated the dust to have settled following the reforms.

 

 

 

Now, however, the improved outlook for European sugar as the industry steps up to the challenge set by the EC has led it to start putting formal preparations for a spin-off in place, with a view to resolution by the end of this year.

 

 

But it is not yet closing the door on other options. At the same time, Danisco has started casing about for a potential buyer, in case this turns out to be the path that creates the most value.

 

 

 

The rationale behind the demerger proposal is that having two separate companies would ensure the best future development opportunities for both areas of activity, while giving shareholders the choice on whether to back sugar or ingredients.

 

 

 

Spin or sell?

 

 

After considering what to do with its sugar operations in collaboration with tax advisors, the company has decided that the best course of action would be to spin off Danisco Sugar to existing shareholders, thereby giving it a separate listing on OMX Copenhagen.

 

 

 

If this happens, shareholders would receive one Danisco Sugar share for each existing share in Danisco.

 

 

 

Danisco said today that its board intends to the spin off to take place before the end of 2008 - unless an outright sale can be agreed "in a timely manner and at a price reflecting the long-term value of the business".

 

 

 

Whichever course of action it decides upon, shareholders will be asked for their approval at a general meeting.

 

 

Better outlook in sugar

 

 

Sugar reform was introduced in Europe in 2006 with the aim of improving competitiveness and market-orientation of the EU sugar sector and guarantee its long term future.

 

 

 

Under the programme, financial incentives are offered to the less competitive producers to leave the market. The goal is to reduce the volume of sugar on the market by six million tonnes by 2010.

 

 

 

Although a shortfall in anticipated reductions caused the EC to introduce a new package of incentives, last month it announced that a total of 2.5m tonnes of sugar quota had been renounced in connection with the first round of the most recent sugar reforms.

 

 

 

Also last month the EC warned that a final, non-compensated quota cut of 1.1m tonnes would likely be carried out in 2010/11 if the industry does not announce further cuts under the voluntary scheme.

 

 

 

Mogens Granborg, CEO of Danisco Sugar, said: "We see the recent EU announcement as a major positive step towards a more stable sugar market in Europe, as it provides a visible mechanism to address the determination of the EC to achieve a sustainable balance between demand and supply in the EU market."

 

 

As a result, Danisco Sugar has upwardly adjusted its long-term financial projections.

 

 

 

After full implementation of the reforms, it expects to be reporting revenue of at least DKK6bn (€0.8bn) and EBIT of at least 10 per cent.

 

In full year 2007/8 it expects to report revenue of around DKK6.75bn (€0.9bn) and EBIT of at least DKK600m (€80.5m); looking forward to 2008/9, it expects to revenue of around DKK 7bn (€0.94) and EBIT between DKK400m (€53.7m) and DKK450m (€60.4m).

 

 

 

Danisco's Q3 results are due out on March 26.

 

 

 

Danisco's sugar quota

 

 

Danisco announced in late January that it would renounce 134,000 tonnes of its sugar quota, bring it to a total of around 967,000 tonnes for the year 2008/9.

 

 

 

This excludes 60,000 tonnes of additional quota for refining raw sugar in Finland, and before any further reductions in the second wave of reforms.

 

 

 

The company will be negotiating with beet growers to discuss how to adjust to the new EU targets, but is not expecting consequences for its production platform.

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