Tiger Brands completes their Nigerian acquisition

Tiger Brands have announced this morning that they have effectively concluded their purchase of 63.35 percent of Dangote Flour Mills, purchasing the equity stake from the parent company, Dangote Industries. Dangote Industries will continue to hold a ten percent holding in Dangote Flour Mills. You will recall that we wrote this up at the time, in early July when the announcement was first made: Tiger Brands close to acquiring stake in Nigerian company. As we wrote at the time, whilst Nigeria is an exciting market for many companies globally, the purchase consideration (which we calculated at the time) was around 2 percent of Tiger's market cap.


Now that we have some more concrete numbers, in terms of the purchase consideration, we can run those numbers again. I remember just after the announcement was made I sent our Nigerian Brokerage connection a couple of questions, which were answered. My concerns were about a huge debt ramp up by Dangote flour mills. Or DFM as the company calls it in the Tiger Brands press release.


I said to Jimi, the analyst in Nigeria who covers the sector: "The simple question that I have is that there is a creaking debt load, and a big jump in short term borrowings from 2010 to 2011, what is this? I cannot find any extra reference on the internet sadly." And then I asked another question: "And secondly at what rates was this funding obtained?"


Jimi then said to me: "Dangote Flour has piled up some huge debts in the last year. Unfortunately its pretty difficult to trace these borrowings to an expansion in production capacity or other capital expenditure. In addition to the increase in the short term borrowing, we also see an increase in other short term liabilities. Has management has piled up debt ahead of a sell-out?" That last question is pretty telling, but it stares at you in the face. Jimi also told me that lots of the Dangote subsidiary companies borrow from the parent, which wields far greater power I assume in terms of funding rates.


But if you were worried, fear not, because of course, as Jimi points out: "I'm sure Tiger Brands will have done their due diligence on these issues because through their acquisition of UAC Foods and Deli Foods, they have been able to deepen their knowledge of the Nigerian market. The deal may have been attractive to Tiger Brands because of Dangote Flour's market share of the food business in Nigeria." Local knowledge is power you see. And talking to people who consume the products, that is quite fun too. That was my interaction with the fellow at the time.

So what did Tiger end up paying? More than I thought initially. 1.5 billion Rands, in local currency that is 30.093 billion Naira. Tiger suggests that they are getting a good deal, as all parties would when you do a deal. "The Purchase Price represents a Transaction Enterprise Value to EBITDA ratio of 8.5x based on DFM's published unaudited annual financial results for the year ended 31 December 2011." Not cheap, but not a crazy purchase price, I would have hoped that they would have paid a little less.


Tiger of course give the rationale for the purchase, we know well that quicker to prepare foods, that are cheap enough to compete with traditional fare are more attractive to the locals. Should we be eating bread down here? That is a separate question, pasta and bread are filling and cheap, and attract almost everyone. Who doesn't enjoy a nice slice of warm bread or fresh pasta? I make my own pasta, really, it is very quick and very easy to prepare and even quicker to eat.


The key paragraph for me in the rationale follows a generic Mark Mobius style explanation, but it makes sense: "Nigeria is a key strategic growth market in West Africa, the second largest African economy and one of the fastest growing economies in subSaharan Africa. With an estimated population in excess of 160 million and projected average real GDP growth forecast over the next three years of approximately 7% per annum, Tiger Brands believes, particularly for consumer goods, that the potential of the Nigerian market is significant. The Transaction will substantially add scale to Tiger Brands' existing Nigerian businesses and strategically positions Tiger Brands to take advantage of the market opportunities within the Nigerian milling sector and related essential food categories."


The market has responded favourably to the deal this morning, the stock is up nearly a percent. We will continue to filter this recent news, but we are still at these levels a buyer of the shares.