ii view: Tate & Lyle focused on new health kick

It's selling a controlling stake in its sweeteners business and returning cash. We assess prospects. 

Selling a controlling stake in its primary products business

• Expects to receive gross cash proceeds of approximately US$1.3 billion (£0.9 billion)
• Around £0.5 billion (US$0.7 billion) be returned to shareholders via a special dividend and associated share consolidation

Chief executive Nick Hampton said:

"Today's announcement represents the next phase in the evolution of Tate & Lyle. Our one strong company will become two stronger businesses, both in a position to pursue new and exciting growth opportunities in their respective markets.

"Building on the strong platform established over the last three years, the proposed transaction will transform Tate & Lyle into a purpose-led, global food and beverage solutions business, serving faster growing speciality markets.”

ii round-up:

Food producer Tate & Lyle (LSE:TATE) today announced an effective splitting up of the company as it agreed to sell a 50% controlling stake in its commercial sweeteners, or primary products business for $1.3 billion (£0.9 billion) to private equity firm KPS Capital Partners. 

The sale of a controlling stake in its primary products business, which makes commodities like artificial sweeteners and industrial starches, will leave Tate focused on faster growing healthier food and drink speciality markets.

Around £0.5 billion of the sale proceeds will be returned to shareholders through a special dividend and associated share consolidation, with the balance of funds used for a variety of purposes including investing in growth opportunities. 

Tate shares rose by around 1% in UK trading, leaving them up by around 23% over the last year. That’s below a one-third gain for the broader FTSE 250 index, although ahead of a near-10% gain for sugar business and Primark owner Associated British Foods (LSE:ABF). 

The primary products business under KPS is expected to continue generating significant and steady free cash flow, with the ability to pay meaningful dividends over time to remaining 50% owner Tate & Lyle. 

Primary products businesses in North America and Latin America are being sold, with its European operations remaining with Tate. Three-quarters of Tate’s revenue in the year to end March 2021 were generated from manufacturing facilities that will remain under its own control.

The deal is expected to complete in the first quarter of 2022 subject to shareholder and regulatory approval. 

ii view:

Under the proposed deal, Tate & Lyle expects to benefit from growing global consumer demand for healthier food and drink; strengthen its attractiveness as a partner to other speciality ingredients businesses; reduce its exposure to commodities markets and bulk ingredients in North America and bolster its balance sheet.

For investors, profits for its remaining sucralose business fell 9% over the last financial year to £55 million, reflecting pricing pressure and higher production costs. Currency fluctuations can also hinder performance. But profit at the soon to be core food & beverage solutions business rose by 12% to £177 million in the year to 31 March 2021. The proposed deal gives it increased business focus on growing consumer demand for healthier food and drink products, while retaining a substantial equity stake in its primary products business. In all, and with Tate pursuing new strategic priorities since 2018, long-term investors may wish to stay patient.  

Positives: 

• Increased business focus
• Reducing debt

Negatives:

• Group revenue fell 3% over its last financial year
• Ongoing pricing pressure at its sucralose business

The average rating of stock market analysts:

Buy