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A sweet deal on the cards

Shareholders in Illovo Sugar have never had it so sweet. The share price has doubled to more than R16 in recent months as a bidding war was declared between two European sugar producers eager to bag Africa’s largest sugar producer.

European sugar producers are combing the globe for less-developed-country supplies ahead of deregulation of the European sugar market. Europe plans to cut domestic production capacity by up to 5-million tons by 2009 and replace with imports from poor countries. The European Union has been accused of distorting world sugar prices by protecting its farmers, prompting it to announce a 36% reduction in prices.

South Africa is not poor enough to qualify for preferential access to Europe in terms of the new sugar regime, but Illovo has operations elsewhere in Africa that do. These are in Mozambique, Malawi, Zambia and Tanzania.

Associated British Foods, the London-listed parent of British Sugar, wants to buy 51% of Illovo for cash, which would cost it about R2,8-billion at current market prices. This may be the cleanest exit route for long-suffering investors, whose shares ambled sideways for much of the last decade until the recent surge in price. British Sugar produces about two million tons a year, roughly the same as Illovo. About half of this comes from sugar beet grown in the United Kingdom, with an additional 500 000 tons coming from China.

But a rival bid from French cooperative Tereos could transform Illovo into one of the largest sugar and ethanol producers in the southern hemisphere. Like Associated British Foods, Tereos wants a controlling stake in Illovo, but instead of offering cash only, it plans to reverse its Brazilian and Mozambican assets into the South African group and top up any shortfall with cash. It is offering to buy at least 51% but no more than 75% of the enlarged Illovo, which would allow it to remain listed on the JSE Securities Exchange.

Tereos’s Brazilian assets comprise 6,2% of Cosan, the largest sugar producer in that country, and 100% of Guarani, which has two mills and produces 600 000 tons of sugar and one million hectolitres of ethanol a year. One more mill will be commissioned by 2008 and another acquired during the course of 2006, raising total production to 1,5-million tons a year.

Brazil is the world’s lowest-cost producer of sugar and has captured 80% of growth in world demand. Should Illovo recommend that shareholders choose the Tereos offer, this will make it one of the top three sugar producers in the world and a sizable player in that country’s ethanol market. Brazil’s sugar sector is booming, buoyed by strong domestic and export demand. Cosan’s share price has shot up 120% since listing on the Sao Paolo Stock Exchange in November last year.

Last year, Tereos acquired 100 000 hectares and a mill in Mozambique from which it produces 80 000 tons of sugar a year. This is expected to grow to 120 000 tons within the next two to three years.

Illovo produces about two million tons of sugar throughout Southern Africa each year. Should it accept the Tereos offer, this would effectively increase its output by about 50%, though Tereos believes this understates the value of the deal.

Stephane Isautier, head of Tereos in the Indian Ocean region, says the group produces five million hectolitres of ethanol a year, four million in France and the rest in Brazil. “This know-how and technology we can bring to South Africa. We also have a large international marketing network that would be made available to Illovo.”

Tereos, whose history goes back to Napoleonic times, was the first European sugar company to make an acquisition in Brazil (in 2000) and later in Mozambique. It produces 2,85-million tons of sugar glucose a year, slightly more than half of this being produced outside of France. It moved into the Czech Republic in 1992 and has since captured 40% of its sugar market.

Isautier says one of the attractions of Illovo is its strong market position in Malawi, Tanzania and Zambia. Competitor Tongaat-Hulett has a stronger presence in Mozambique, but that would change should the Tereos bid succeed. He dismisses fears that Tereos would bleed Illovo of cash. “Tereos is a cooperative, not a listed company, so we don’t have the same pressures that face a listed company.”

And Illovo executives need not worry about their jobs: Isautier says Tereos intends keeping them, as they do in all such acquisitions.

Illovo’s fortunes have taken a dramatic turn for the better in the past year as the world sugar price has more than doubled. Global supply is expected to reach 144,2-million tons this year, a shade under forecast consumption of 143-million tons, which is rising at the rate of about 3% a year.

Most of this is consumed in domestic markets, with just 30-million tons trading each year on the world sugar market, in which Brazil is the dominant player.

Much of the new demand is for bio-fuels: several countries have announced plans to build ethanol plants using sugar cane as the raw material in an effort to reduce their dependence on fossil fuels. Brazil is the world leader in ethanol production, which accounts for half its sugar-cane output.

Last year, 70% of the vehicles sold in Brazil were flexible-fuel, able to run on gasoline or ethanol. The increase in global sugar prices has been fuelled by the demand for ethanol from sugar cane, and disruptions to United States output following unusually heavy hurricane activity last season.

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Ciaran Ryan
Guest Author

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