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Durban - Illovo Sugar's R3bn rights offer will leave the group, Africa's largest sugar producer, in a strong position to benefit from exports into premium-priced world markets, particularly the European Union (EU) where from October 2009 many African countries will benefit from duty-free, quota free access.
Illovo has substantial operations, including mills, refineries and cane lands, in six African countries. All have access to the EU, five as Least Developed Countries and the sixth, Swaziland, as a member of the African, Caribbean and Pacific trade group.
Structural reform of sugar production in the EU, including the reduction of export subsidies and lower support for European beet farmers, has moved this market from surplus into deficit. The EU's sugar production has dropped nearly 6 million tons and will be met by traditional exporters to the EU, including Africa.
But Illovo will also use the proceeds of the rights offer to reduce debt.
It has not spelt out exactly how much, saying the R3bn will be used to "finance some expansion projects" and the balance to repay some loans.
However, speaking to Fin24.com shortly before details of the rights offer were released, Illovo MD Graham Clark said the group would like to get back to its target gearing of 40%.
In the financial year to end-March Illovo's debt increased from R1.67bn to R2.41bn, raising gearing from 40% to 70%.
"It's very important for us to get away from debt, which has become more expensive and onerous due to the global financial crisis. The rights offer should get us well within our 40% target debt-to-equity ratio," he said.
Majority shareholder Associated British Foods, which holds 51.3% of Illovo, has undertaken to follow its rights and will if necessary underwrite the balance of the rights offer, subject to its interest in Illovo not exceeding 60%.
Fund manager Allan Gray, which holds 23.4% of Illovo in its investment funds, has also undertaken to follow rights for its clients.
But the rights offer will almost certainly be fully subscribed. Illovo has a sound record of investing in expansion projects.
Apart from enjoying duty-free access to the EU, Clark said another advantage is that its African operations will now be able to export higher value, refined sugar instead of the raw product.
- Fin24.com