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Tate & Lyle is one of the oldest companies on the UK stock market. But in recent years it has changed out of all recognition. It gave up sugar in 2010. It has since shed its commercial sweetener arm. It is now bulking up with a $1.8bn acquisition of CP Kelco, a US maker of speciality ingredients, from family-owned JM Huber. The 11 per cent share price fall on Thursday is a sign of investors’ nerves about the scale and quality of the deal.
There is a logic to the acquisition. CP Kelco’s range of pectins, gums and other nature-based ingredients complements Tate & Lyle’s own products. They are particularly focused on improving the “mouth feel” of low-fat or low-sugar products. Making processed food healthier might sound like an oxymoron. But the $19bn market for this type of high-margin food ingredient is growing at 6 per cent a year.
This is a rare big buy by a UK-listed company stateside. The deal adds about 30 per cent to Tate & Lyle’s revenues. Net debt to ebitda will rise to 2.3 times, thanks to the $1.15bn cash payment. JM Huber, one of the largest private companies in the US, will get 75mn in Tate & Lyle shares, and plans to be a long-term holder of its 16 per cent stake.
Expansion does not come cheap: the deal values CP Kelco at about 14 times its 2023 ebitda. After $50mn of annual cost savings, this drops to about 10 times. That is lower than peers such as Kerry Group, which trades on 13 times, but well above Tate & Lyle’s own multiple of 8.5 times.
The timing, however, looks reasonable. Some of the air has come out of sector valuations thanks to weight-loss drugs and a backlash against processed foods. Food ingredient makers have long traded at a 10 per cent discount to the specialist ingredient sector. The valuation gap has widened to 30 per cent over the past year, according to Barclays analyst Alex Sloane.
CP Kelco’s recent poor financial record is a bigger concern. Its ebitda margins fell by a quarter to 17 per cent in the two years to 2023. Half of that relates to supply chain disruption associated with a capital investment programme. The rest is attributed to inflationary pressures, post-pandemic destocking and customer belt-tightening.
Tate & Lyle, which has long collaborated with CP Kelco, is confident it can turn the business round. But the planned departure of chief financial officer Dawn Allen, who is moving to Haleon in October, is a complicating factor. Integrating a large and underperforming business will be a big task for her successor.
