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FMN Plc, HGL’s DEAL : OTUDEKO’s STRATEGIC JOKER

Is it a fight-back or  strategic move to deliver batter synergic values  ?

Sun Tzu ,author of The Art of War , taught every warrior a lesson on how to be at alert and ever-ready in case of any exigency or danger from enemies . In one of his recipes against unforeseen attacks , Tzu noted : “A skillful military operation should be like a swift snake that counters with its tail when someone strikes at its head ,counters with its head when some strikes at its tail and counters with both head and tail when someone strikes at its middle”.

Though the recent issue at First Bank of Nigeria where the Central Bank of Nigeria reversed certain decisions taken by the board was a war per se , however , the recent steps or initiatives of Obafemi Otudeko to offload his equities in First Bank of Nigeria and Honeywell Flour Mills Plc. (“HFMP”), a portfolio company of Honeywell Group Limited, HGL. has proved beyond any doubt Oba Otudeko’s uncanny ability to pull his chestnuts out of the fire and save his face from what some believed or alleged was a gang-up to impugn his influence in the corporate circle .

There is ,no doubt, Obafemi Otudeko is quick witted . After some subterranean moves , Otudeko struck a deal with the Flour Mill of Nigeria and signed agreement to dispose his 71.69% Stake in Honeywell Flour Mills ; at a total enterprise value of NGN80 billion to FMN. . In addition, FMN also entered into an agreement with First Bank of Nigeria Limited (“FirstBank”) to acquire the Bank’s 5.06% equity in HFMP. Consequently, upon completion of the acquisition, and subject to obtaining all requisite regulatory approvals, FMN is set to hold a circa 76.75% equity interest in HFMP. Given FMN’s parallel negotiations for both stakes culminating in the agreements being signed on the same date, the basis for arriving at key commercial terms including final equity price per share, will be the same according to the agreement The final equity price payable will be determined by HFM’s “adjusted net debt and net working capital” on the date of completion.

Based on HFM’s H1’22 numbers, analysts expect the acquisition price to be well above its recent price of NGN3.39, perhaps above NGN5.00/per share. They also believe that FMN can comfortably finance the deal, using its robust cash balance of NGN52.7bn (as at H1’22) and would not have to use new debt

The deal ,indeed, unsettled some interest groups as the felt threatened while the joker caught some off guard .. It was not without some objections . . Ecobank Nigeria Limited warned Flour Mills of Nigeria Plc against the proposed acquisition of equity stake in Honeywell Flour Mills Plc, alleging that Honeywell Group Limited, the parent firm, had not been paying up its loans from the bank. Ecobank said it had advanced several loan facilities, which included working capital disbursements, to Honeywell Flour Mills.The bank said due to the failure of the company to liquidate the said loan facilities, it was constrained to commence winding up proceedings against Honeywell Group Limited at the Federal High Court, Lagos in suit no: FHC/L/CP/1571/2015

But the frayed nerves were calmed .The above position was however countered by both Flour Mill and Honeywell .The managements of both Honeywell Flour Mills and Flour Mills of Nigeria Plc have both issued official statements assuring stakeholders that the recent announcement to acquire majority stake in Honeywell Flour Mills Plc (“HFMP”) on Monday 22nd of November, 2021, was made after carrying out necessary due diligence and obtaining appropriate legal guidance.

Honeywell Flour Mills Plc (“HFMP”) assured its stakeholders that the recent announcement on Flour Mills of Nigeria Plc”s (‘FMN’) acquisition of a majority stake in HEMP on Monday 22nd of November 2021, was made in compliance with all rules and regulations. This further assurance has become necessary in view of the publication captioned “Ecobank Warns against Acquisition of Honeywell Flour Mills, Alleges Company Facing Winding Up Proceedings

Flour Mills of Nigeria Plc also assured the stakeholders that acquisition of majority equity interest in Honeywell Flour Mills Plc was not in breach of any subsisting order of Court .Flour Mills of Nigeria Plc assured its stakeholders that the recent announcement by the Group to assume majority shareholder status of Honeywell Flour Mills Plc (“HFMP”) on Monday 22°¢ of November, 2021, was made after carrying out necessary due diligence and obtaining appropriate legal guidance.

SYNERGIC VALUES AND POTENTIALS

Otudeko’s decision is ,no doubt , strategic and has changed the industry and sector dynamics. The leadership of the two institutions involved appear to be feigning ignorance on the political angle of the initiative .Though some see it as fighting a psychological warfare over First Bank board versus CBN skirmishes or as a move partly to frustrate or counter the gang-up against Oba Otudeko in First Bank, they are ,no doubt , proving that it is synergic initiative to create better values. .Commenting on the transaction, Honeywell Group Limited Managing Director, Obafemi Otudeko said: “Today’s announcement is in line with the evolution of Honeywell Group and our vision of creating value that transcends generations. For over two decades, we have supported Honeywell Flour Mills to build a strong business with a production capacity of 835,000 metric tonnes of food per annum. Following the transaction, Honeywell Group will be strongly positioned to consolidate and expand its investment activities, including as a partner of choice for investors in key growth sectors.”

Omoboyede Olusanya, Group Managing Director of Flour Mills of Nigeria, emphasized the above position : “The proposed transaction is aligned with our vision not only to be an industry leader but a national champion for Nigeria. We believe that this will create an opportunity to combine the unique talents of two robust businesses. As a result, we will have a better-rounded and more comprehensive skill set available to us as a combined diversified food business, thus enabling us to better serve our consumers, customers and other stakeholders, whilst providing employees with access to broader opportunities.”

Stakeholders, they believe , would benefit from the more than 85-year combined track record of FMN and HFMP and their shared goal of making affordable and nutritious food available to Nigeria’s population.

The scale of the transaction provides employees of the consolidated company with more career development opportunities in a larger organisation, with the potential to create more jobs in the economy as it will have more brands and categories, and a larger and more geographically diverse footprint.

Customers across the nation will benefit from access to a wider product range and a robust pan-Nigerian distribution network, accessing greater number of points of sale supported by enhanced customer-focused sales teams and redistribution capabilities.

The combination will also serve as a catalyst for an even stronger stream of innovation that is focused on local content offerings.

The country and its food security agenda will benefit from both companies’ focus on developing Nigeria’s industrial capability, its agricultural value chain and specifically backward integration of the food industry.

Their optimism is partly prompted by the fact that Nigeria presents vast opportunities, particularly in light of the country being the largest market on the continent as well as a signatory of AfCFTA.

The two institutions allayed the fear of the Minority shareholders of HFMP .According to them, HFMP’s listing will be retained for the foreseeable future and the “minority shareholders of HFMP will be treated fairly and in line with capital market regulation. Further information will be provided within the required channels and timeframes.”

The above potentialities may not be farfetched . Plant capacity is a significant indicator of a company’s market share in the milling sector. Therefore, using industry capacity as a proxy, the combined entity will be the second largest miller in Nigeria, with an estimated capacity of 9,600 MT/d, behind Olam’s 11,140 MT/d. Since it entered the Nigerian (and West African) market in 2012, Olam has preferred acquisitions as a strategy to increase its competitive position, emerging as the largest miller after it acquired Dangote Flour Mills (DFM) in 2019.

Based on some analysts estimates, Olam has an industry market share of 44%, ahead of FMN’s current estimate of 32%. With the completion of the acquisition, FMN’s market share will rise to c.42%. “We note that BUA Flour Mills (1,600MT/d) is currently constructing an additional 2,600 MT/d milling capacity which was to come on stream in 2021, but is now unlikely (will bring its total capacity to 4,000 MT/d). While we believe the transaction has long-term competitive benefits for FMN, we also believe this deal is likely to be earnings accretive as long as FMN can sweat the assets better and derive synergies which are unquantified currently. On an annualized basis, FMN’s PBT margin is around 3% compared with just under 1% for HFM”,the analysts declared .

THE TAKE-OVER AND CHALLENGES

No doubt b, large companies are essential to the wealth creation process for a number of reasons.

First, having a capacity to match the resources and global distribution of large competitors brings advantages ; large companies also tend to devote a disproportionate share of their resources to training and education ; opening the door to many of tomorrow’s mega-opportunities will require significant resources. and why one must be concerned with the fortunes of large companies—they are significant employers.

However, the road to the above synergic is paved several challenges. In the battle for the future, lethargy, convention, myopia, and elitism are much more real and much more substantial enemies than the size limitation or advantage .The real challenge of FMN is its capability to leverage resources This may not be farfetched .Bigness without stretch and leverage is obesity, just as smallness without stretch and leverage is impotence. Synergic values creation is only a function of size but foresight, stretch, and leverage. These provide the energy and rationale for proactive advantage building and industry re-engineering.

The above views prompted a question on how efficiently the Flour Mills of Nigeria could leverage the current resources at its disposal and tackle the challenges from the institution it intends to take over . The challenges of high leverage and cost controls are the immediate obstacles .Although , the fortunes of Honeywell Flour Mill have been improving in the recent time particularly from the point of view of its 2021 financial year , the issue of costs and rising debts or leverage remain two hard nuts before the FMN before the potential synergies could be delivered . A look into its 2021 financials exposes these debacles . Revenue rose year-on-year by +36.23% from N80.45bn in FY2020 to N109.59bn in FY2021. However ,cost of sales increased by +41.13% from N66.59bn in FY2020 to N93.97bn in FY2021

Total debt rose slightly by +3.76% in FY2021 from N58.29bn in FY2020 to N60.48bn. Much of the debt was the consequence of a rise in short-term trade finance during the course of the company’s ordinary business. A review of the FY2021 financial statement of the company, showed that loans from First Bank of Nigeria Limited comprised 45.98% of the company’s total non-current debt, while direct interventions from the CBN and Bank of Industry contributed 0.55% and 10.22% of the miller’s loans. Loans from the Real Sector Support Fund (RSSF) under the CBN through Polaris Bank and Fidelity Bank comprised 15.52% and 27.72% respectively. The company’s financial statement noted that all the grain miller’s loans were performing Finance cost up significantly Y-o-Y by +43.57% in FY2020, from N4.23bn in FY2020 to N6.07bn.

The overall liquidity of the Noodles maker improved in FY2021; the liquidity ratio rose to 31.17% in FY2021 as against 25.93% in FY2020.The company recorded its highest liquidity ratio in FY2021

The FY2021 result of the company showed an improvement in its current ratio, from 0.69 in FY2020 to 0.74 in FY2021, although analysts see a current ratio of 2.1 preferable and indicative of more stable liquidity. The improvement in the company’s current ratio was attributable to a +24.52% rise in current assets. In 2018, Honeywell Flour mills recorded its highest current ratio of 0.77 while the lowest ratio was seen in 2017 The company’s acid-test ratio (a ratio that adjusts the current ratio for inventories) equally improved in 2021, although only marginally. The miller’s acid ratio rose from 0.36 in FY2020 to 0.42 in FY2021. Corporate analysts believe that an acid-test ratio of 1.1 or higher shows a desirable capacity of a company to meet its short-term obligations without its inventories.

Honeywell Flour Mills’ leverage ratio has seen exponential growth in the last five years. FY2021 result showed a debt-to-equity ratio of 104.34% as against 101.98% in FY2020. The total debt of the company grew marginally by +3.76% Y-o-Y while total equity had a slower Y-o-Y growth of +1.41% A breakdown of total debt showed that the company’s current debt rose by +20.36% Y-o-Y while its non-current debt fell by -15.79% Y-o-Y.

The pasta maker’s profit before tax (PBT) rose Y-o-Y by +24.13% from N1.27bn in FY2020 to N1.58bn in FY2021, this was supported by a +39.08% rise in operating profit despite a +43.6% climb in finance cost.In 2019, PBT significantly fell Y-o-Y by -87.53%, but saw a rebound in 2020, although not as high as 2017 levels

For FY2020, profit after tax (PAT) grew faster than profit before tax (PBT), PAT grew Y-o-Y by +73.08%, because of a -27.25% decline in tax and despite a +69.70% increase in Police Trust Fund Levy.

However, FMN is believed to have the wherewithal and managerial sinecure to combat the above challenges and square it up with OLAM Nigeria in battle of industry supremacy • Between 2015 and 2019 its profitability increased significantly though it was historically lower than the industry average.

Unlike , Honeywell ,its financial structure is better as it uses less debt than companies in its industry .Moreover its products are well known in Nigeria, allowing them to make good sales

However, like Honeywell, its earnings stability is not guaranteed as the company faces cost issues just as its shares are undervalued relative to the shares of companies in its industrySequel to this its current share price is therefore not high given the company’s growth prospects and results

What is more reassuring is that its post covid and financial year ended March 2021 performance was supersonic . Revenue grew by 34% to N772bn from N574bn in the previous quarter, profit before tax grew by 116% to N37bn,.profit after tax grew by 126% to N25.7bn while Net Assets grew by 12% from N156bn to N175bn.

The complementary transaction combines FMN’s market-leading offerings that include grain based foods, sugar, starches, oils, spreads and breakfast cereals with HFMP’s market leading diverse and differentiated range of carbohydrate products.

The proposed transaction will combine two businesses with shared goals and create a more resilient national champion in the Nigerian foods industry, ensuring long-term job creation and preservation. A combination of FMN and HFMP will bring together two trusted and iconic brands, creating a food business that is better positioned to benefit the growing Nigerian population and leverage opportunities stemming from the African Continental Free Trade Area (“AfCFTA”)

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