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Unlisted staple food producer Premier Foods – which is backed by private equity powerhouse Brait [JSE:BAT] – looks set to go on the offensive in the food sector in a move that could shake up the operating environment for listed South African competitors, including AVI [JSE:AVI] and Tiger Brands [JSE:TBS].

Premier Foods – whose brands include Blue Ribbon bread and Iwisa maize – is planning to branch out into other food categories and wants to start discussions with other food producers of similar size for a possible merger, as it plans to widen its scale of operations.

Those plans to expand are given credibility after the company concluded a deal with Brait, in which the financial powerhouse has committed to becoming a long-term shareholder in Premier with an option to raise its 49,9% stake up to 80% over the next five years.

In an interview, current Premier CEO Ian Visser – who will assume the role of group CEO, with a focus on overall strategy, expansion into Africa and acquisitive growth following the restructuring – stopped short of saying he’d like to do a deal with AVI, SA’s third largest listed food company – but only just. While emphasising there were no discussions between the two companies, Visser says AVI was a good example of the kind of company Premier would like to talk to about a possible deal.

AVI – parent company for household brand names such as Bakers and Five Roses, among others – is a major Premier customer and the two have a long-established relationship. In terms of revenue, this year AVI’s exceeded R7bn while Premier’s was slightly above R5bn.

Says Visser: “The advantage we have is because we don’t have such a wide basket – say, like Tiger Brands or Pioneer Foods – there are many companies we can talk to and get the deals through the Competition Commission.”

In March 2009, Tiger Brands – SA’s biggest food producer, with a fat balance sheet – changed tack on its intention to make an offer for AVI, apparently because it was advised SA’s antitrust body might have an issue with such as deal.

Anthony Clark, a food analyst at Vunani Securities, says while AVI would be an attractive buy for Premier, such a transaction would be “dynamic and unworkable”. “AVI is an efficiently run business. If it were to make an offer, all the other big food companies would want to get involved and the price would go astronomical,” Clark says.

Visser says behind its strategy to seek other food categories and acquisitions is the realisation that Premier – as a major player in the staple food market (it commands 78% of SA’s flour market) – can’t achieve bigger volumes growth. He disagrees with the view that there isn’t much left for size-able acquisitions in the industry, suggesting the group may look for opportunities in segments such as dairy and poultry.

Clark says while there’s still scope to navigate, most promising counters aren’t up for sale.

Visser says: “For us, the commonality is customers. We look at it from a distribution point of view. What is it we can put into the same bakery truck without contamination? Obviously, we can’t put paraffin with bread. But most of the other foods, especially canned food, are very easy to put in the same delivery truck.”

Visser says the move into sub-Saharan Africa will be incremental and the group prefers partnerships. “The Africa strategy is an enduring one. This transaction (with Brait) gives us the ability to take a 20-, 30-, 40-year view. The SA market is very competitive and highly saturated. That’s not to say any other sub-Saharan country isn’t competitive… This is a developing market. People are eating, but what they’re eating is too expensive and it’s not getting to them reliably. And the quality, quite frankly, is shocking.”

Visser predicts that over the long run Premier’s South African business will be a small portion once it’s got a hand on the rest of the sub-Saharan Africa market. 
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