ii view: Tate & Lyle’s £1.4bn acquisition underwhelms

Proposed acquisition of CP Kelco for £1.4 billion

Chief executive Nick Hampton said:

"A combination with CP Kelco is the perfect fit with Tate & Lyle's growth-focused strategy and purpose. It significantly strengthens our Sweetening, Mouthfeel and Fortification platforms, enhances our solutions capabilities across our four core categories, and unlocks new growth opportunities.

“The growth potential of the proposed combined business is significant and we look forward to the future with confidence and excitement."

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ii round-up:

Food and beverage ingredient maker Tate & Lyle (LSE:TATE) today announced a proposed acquisition of US ingredient maker CP Kelco for $1.8 billion (£1.4 billion).

Kelco, which makes items including pectin, used to thicken foods, is expected to prove earnings accretive during its second full financial year following completion, and strongly accretive thereafter. 

Tate shares fell 9% in UK trading having come into this latest news down around 10% over the last year. That’s comfortably below a 26% rise for food ingredient maker and owner of Primark, Associated British Foods (LSE:ABF), and in contrast to a near 9% improvement for the FTSE All Share over that time. 

With a focus on sweetening, fortification, and texture, Tate & Lyle makes ingredient solutions aimed at lowering sugar, calories, and fat as well as adding fibre and protein. A recent business stake sale for $350 million in Primient left Tate fully focused on healthy speciality ingredients. 

The acquisition potentially sees Tate acquiring CP Kelco businesses in the US, China and Denmark and unlocks further growth opportunities in the $19 billion addressable speciality ingredients market.

Tate also announced the start of a share buyback programme of up to $215 million following the Primient sale. 

The acquisition of CP Kelco is expected to complete in the fourth quarter of 2024. 

Tate is scheduled to hold its AGM on 25 July with first-half results due 7 November. 

ii view:

Speciality ingredients produced by the FTSE 250 company are used across beverages, dairy products, bakery, snacks, soups, sauces, and dressings. Tate employs 3,300 people across more than 55 locations and serves customers in 121 countries. North America generated its biggest slug of sales during its last financial year at 47%, followed by Asia, Middle East, Africa and Latin America at 29%, and Europe 24%. 

For investors, sales in its fiscal year to late March fell 6%, hindered by lower volumes due to softer consumer demand. Earnings accretion following this sizeable acquisition are not imminent, costs generally for businesses such as wages remain elevated, while currency headwinds can impact numbers given significant overseas sales. 

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On the upside, the proposed purchase of Kelco will strengthen its speciality ingredient offering with Tate and Kelco having worked together previously. Tate’s transformation to speciality ingredients was previously completed with a focus on products to assist health now being pursued. Further cost savings following the Kelco acquisition are being targeted, while shareholder returns are being further enhanced given the start of a new share buyback programme. 

Tate now offers a more focused strategy and forecast dividend yield in the region of 3%, although an acquisition of this scale compared to a stock market value of £2.5 billion is significant and not without risk.

Positives: 

• Focus on healthy food ingredients
• New share buyback programme

Negatives:

• Tough consumer outlook
• Potential currency headwinds

The average rating of stock market analysts:

Buy