‘The next phase in the evolution of Tate & Lyle’: Ingredients supplier spins-off bulk sweetener business
The disposal will see KPS Capital Partners take a 50% stake in the new entity, which will consist of Tate & Lyle’s Primary Products business in North and Latin America and its interests in the Almidones Mexicanos and DuPont Tate & Lyle Bio-Products Company. The new venture, named NewCo, has an enterprise value of US$1.7bn, equivalent to a multiple of 5.1 times EBITDA. KPS will have board and operational control.
Tate & Lyle expects to receive gross proceeds of around UD$1.2bn (£0.9bn) after adjustments and transaction costs. Of this, the company said £0.5bn will be returned to investors through a special cash dividend.
The balance will be retained to strengthen Tate & Lyle’s balance sheet, provide flexibility to invest to accelerate growth, the company said.
“Today’s announcement represents the next phase in the evolution of Tate & Lyle. Our one strong company will become two stronger businesses, both in a position to pursue new and exciting growth opportunities in their respective markets,” Tate & Lyle CEO Nick Hampton commented.
Tate & Lyle increasing focus on fast-growth specialities unit
By strengthening the balance sheet Tate & Lyle suggested it is creating a platform to re-focus capital towards both organic and inorganic growth opportunities, hinting at potential future portfolio adjustments.
The company has set itself the target of growing organic sales in the mid-single digits, while also expanding its operating margin by 50-100 basis points and delivering an organic return on capital employed improvement of 50 basis points.
Is it doable? Jeffries analyst Martin Deboo certainly sees some upside for a trimmed down Tate. "We have never thought about Tate as an 'organic growth plus margin' proposition but - in the spirit of the new zeitgeist - we note that, since FY2017, volumes in the going-forward business have grown 2-3%, margins have expanded by circa 60bps per annum and operating profits at constant [currency exchange rates] have grown circa 6% pa. Looking forward, Tate have the opportunity to leverage growth by elimination of stranded costs and reduce the central cost burden of circa £50m. Assuming for the sake of argument that £15m of that could be eliminated over three years, that would be accretive to EBIT growth to the tune of 3% per annum," he noted.
Focusing investment on its higher margin, higher growth, specialities business should also help in this regard.
“The proposed transaction will transform Tate & Lyle into a purpose-led, global food and beverage solutions business, serving faster growing speciality markets. With our new focus and a step-up in R&D investment, innovation and solutions development, we will be able to significantly enhance how we serve our customers, and accelerate growth,” Hampton said.
In particular, the chief executive highlighted, Tate & Lyle’s expertise in reformulation feeds directly into growing consumer demand for – and industry innovation efforts in – healthier and better-for-you product formulations.
“Our deep scientific expertise, unique product portfolio and leading technical capabilities in sweetening, mouthfeel and fortification, position us very well to benefit from growing consumer demand for food and drink that is lower in sugar, calories and fat, and with added fibre. With the pandemic accelerating the trend towards healthier food, now is the right time to focus our business on capturing this growth.”
Despite this growth story, Tate's long-awaited deconsolidation didn't have a big impact on the group's share price, which edged up just 0.2% today. While Deboo joked it could be a 'consequence of an ill-tempered post-Euro 2020 hangover for UK investors', with England losing in the final of the football tournament against Italy yesterday, more likely the lacklustre market response should be chalked up to the valuation, which Deboo said was 'lower than expected', as well as financial costs and Primary Product losses in Europe, which will stay with Tate.
NewCo: ‘A tremendous investment platform’
While Tate & Lyle said it expects its core business – which will retain the European Primary Products operations – to benefit from the deal, the company added that maintaining a 50% stake in NewCo should also yield dividends.
It is expected that NewCo will generate ‘significant and steady’ free cash flow and deliver ‘meaningful dividends over time’, the company said.
NewCo will become a leading provider of nutritive sweeteners, industrial starches, acidulants and other corn-derived products in North America and Brazil. The Company produces corn-derived products for a diverse set of end-uses, including carbonated beverages, confectionery products, packaging applications and animal feed.
“Our investment in NewCo will create a leading, independent and focused manufacturer of critical corn-derived ingredients for both food and industrial markets,” Michael Psaros, Co-Founder and Co-Managing Partner of KPS, said.
“The size and scale of NewCo, and the tremendous growth opportunities made available by serving as a critical supplier to the world’s preeminent food, beverage and industrial companies, forms the foundation of a tremendous investment platform. We will leverage our successful, multi-decade experience of investing in process industries, our commitment to manufacturing excellence and global network to drive increases in revenues, productivity and profitability.”
Psaros said KPS intends to work alongside the existing management team to ‘accelerate growth opportunities’. He said this will be achieved through ‘substantial investments’ in NewCo’s assets and operations, as well as synergistic bolt-on acquisitions.
“We will invest in research and development in close cooperation with customers to introduce new products and product categories, in order to capitalize on long-term trends such as the transition to a more plant-based diet by consumers worldwide.”
Tate & Lyle and NewCo have entered into 20-year long-term agreements to provide supply security and economic protection for Tate & Lyle’s Food & Beverage Solutions’ products made in NewCo’s facilities, and to ensure continued alignment of objectives between the two companies. Seventy-five percent of Tate & Lyle’s revenue in the year ended 31 March 2021 was generated from manufacturing facilities that will remain under its own control, the company noted.
Hampton concluded: “We look forward to working with them under the long-term agreements we have established to provide supply security and economic protection to both the Primary Products Business and Tate & Lyle’s retained businesses.”