SOVEREIGN Food Investments - hardly a well-known stock in the JSE's food sector - is the unlikely flocking point for smaller participants in the local poultry sector.
This week, Fin24.com reported that listed poultry group Country Bird Holding (CBH) had snapped up a 13.4% stake in Sovereign, while in a separate deal listed agri-business Afgri had proposed taking control of Sovereign by reverse listing its Afgri Foods business.
Naturally, the Afgri deal - because of its greater scope upfront - looks quite compelling.
Certainly, the deal is well timed with both Afgri Foods and Sovereign set to reap the benefits of considerable investment in expansion.
Afgri's Daybreak chicken business has recently invested R110m to expand its hatchery facilities to 850 000 day-old-chicks a week (from 550 000) and is expanding its abattoir facilities to 650 000 birds a week from 470 000 a week.
Sovereign, on the other hand, has built over 100 000m² of additional environmentally controlled poultry housing. The company's R62m hatchery recently reached its targeted first phase production of just over 900 000 birds per week (with a capacity to produce 2 million birds a week in the longer term).
Still, there is every chance that Sovereign shareholders - who must be delighted that the corporate activity has sparked the company's languishing share price - might have to choose between competing offers from CBH and Afgri.
That, of course, presumes that CBH will make a counter-bid to take over Sovereign - an event I would say is fairly likely in the weeks (perhaps days) ahead.
I would not even be surprised if a third entity enters the fray, because I have heard from my reliable Eastern Cape sources that quite a few more parties - other than CBH and Afgri - have been milling around Sovereign's offices.
Size matters
Both CBH and Afgri have made it very clear that size counts in the local poultry industry. The gist of the argument is that the industry needs a third player of "size" (and geographic spread) to compete with market leaders Astral Foods and Rainbow Chickens.
Afgri's animal protein division, which includes poultry and feeds, is a sizeable business with turnover of about R2.7bn. Sovereign - according to its newly released annual results - generates turnover of about R900m.
One would presume the merging of two businesses of such size would offer an opportunity to cash in on some synergies and efficiencies.
With this in mind, one has to wonder what could be achieved if CBH - rather than being a rival bidder - were party to the merger. CBH would add a further roughly R2bn of sales to the merged entity, which would generate annual revenue of close to R6bn.
The combination of CBH, Afgri and Sovereign would create an entity with roughly the same level of sales as Rainbow Chickens and not far off the R8bn-a-year Astral Foods business.
But I'm not as naive as to expect a three-way merger - at least not in the foreseeable future. Getting three sets of executives, each as strong-willed as the other, to agree to merger terms would require extraordinary magnanimity - the kind that could only be induced by spiking the boardroom tea urn with large doses of ecstasy.
In this regard, I do note that recently-appointed CBH CEO is none other than former Afgri CEO Jeff Wright, whose affairs at that company have been mischievously reported.
Ultimately, if the "bigger smaller" players in the poultry sector are determined to compete with the industry giants, then perhaps executives have to swallow their pride (and price) to get down to negotiations that could benefit their respective shareholders and consumers alike.
While mulling possible outcomes from these developments, it struck me that another major poultry player - at least in the Western Cape - is Pioneer Foods' Tydstroom chicken business.
Would Pioneer come into the reckoning if the smaller poultry players were ganging up against Astral and Rainbow?
Pioneer MD Andre Hanekom says consolidation among poultry groups would definitely be good for the industry, in that it would increase competition. "The better our competitors are, the better we are. Put it this way, it's not something we would complain to the competition authorities about".
The problem for Pioneer of course is that it owns 100% of its agri-businesses and may not fit the group's strategy to hold a significant minority stake of a larger combined operation.
Some may think Pioneer has the muscle to lead a poultry consolidation by bringing in sizeable chicken and feed players under its wing. I don't think though that Hanekom and his board would want Pioneer to take on any more debt at this stage.
But who can predict what could transpire if the poultry sector does undergo a rapid consolidation?
- Fin24.com