Multinationals are betting on continent’s emerging middle class for growth. The sale of one of Nigeria’s top beverages companies is showing that appetite among foreign investors for Africa’s food sector remains buoyant in spite of a recent drop in the profitability of many regional companies.
The family behind Chi Farms, which markets juice and dairy products in Nigeria, has put the company up for sale, attracting tentative interest from multinationals such as Nestlé and Kraft and private equity groups including KKR, Blackstone and Carlyle, according to people familiar with the talks.
The sale, expected to conclude in early 2015, could fetch between $750m and $1bn, the same people added, according to the Financial Times. The first round of bids is expected soon.
The sale talks follow two major food and beverages deals last week in Africa. Danone, the yoghurt maker, paid €278m to tighten its control over Morocco’s main dairy company, Centrale Laitière. Abraaj, a Dubai-based private equity group focusing on emerging markets, has offered nearly $120m for Bisco, one of Egypt’s top biscuit makers.
In August, Sanyo Foods, Japan’s third-largest maker of instant noodles, paid $233m for a 25 per cent stake in the packaged food business of commodities trader Olam in Nigeria, in a rare deal, bringing an Asian group into Africa.
“The food and beverages sector remains quite attractive as the middle class expands,” says an investment banker involved in African deals.
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Nor are the Ebola crisis and signs of slower economic growth in some countries, including Nigeria and Angola, due to a drop in oil prices, deterring potential investors, the banker added.
But executives are warning that the rapid arrival of new players into the food, beverages and consumer goods sector could hurt profits because of much greater competition . “The era of fat margins is over,” says a Lagos-based food group senior executive. He added that some new investors were pouring in money using valuations based on old – and unrealistic – return assumptions.
In fact, results at the local subsidiaries of Nestlé, Cadbury, Guinness and Unilever have shown a big drop in profitability. Dangote Sugar, a unit of the conglomerate owned by Aliko Dangote, Africa’s richest man, has also suffered.
Esili Eigbe, a consumer analyst at emerging markets specialist Exotix in Lagos, wrote to clients that the recent drop in profits was due to “weakness in consumer spending” in Nigeria and other African countries. In addition, “competition among local consumer companies has risen significantly in the last few years, owing to the entry of new players across categories,” he said.
Investors played down the fears, insisting that over a 10-year horizon, the consumer goods sector offered higher rewards than in other regions.
So far this year, the food and beverages industry in Africa has seen deals worth $1.1bn, nearly double the $668m in 2013, according to Dealogic, the data provider. The number of M&A deals was 45, the second highest since 2008.
Over the past five years, the sector has become a magnet for foreign investors as they bet the continent with the world’s youngest population will in time demand more juice, confectionery and beer. For many multinationals – as well as local entrepreneurs – families emerging from poverty and joining a new consuming middle class represent one of the biggest opportunities in business.
The African Development Bank estimates that the middle class, which numbered 115m in 1980, has grown to 326m in the past three and-a-half decades.
Despite the rapid growth, Africa still has the smallest middle class as a share of population of all emerging regions. According to the AfDB, the middle class accounts for 33 per cent of the population, compared with 56 per cent in developing Asia and 77 per cent of Latin America. Hence, foreign investors – and local groups – are betting that the middle class will continue to grow.
However, food executives – and the AfDB – caution that most of the new middle-class members are living barely above the poverty line.
