Tate & Lyle buys healthy food competitor – how did markets react?

Tate & Lyle’s shares fell by 9% after it confirmed that it will focus on healthy food products by buying ingredients supplier CP Kelco for $1.8 billion, say Helen Cahill and Isabella Fish in The Times . Tate & Lyle says the deal will help it meet a target of annual revenue growth of between 4% and 6% by capitalising on mounting demand for healthier foods.

It also hopes that buying CP Kelco will expand the group’s range of products that can help “sweeten foods, provide the right texture and improve fibre content”. The deal comes amid intensifying scrutiny of ultra-processed foods such as flavoured yoghurts and sweet snacks, with research increasingly linking them to diseases including cancer and Type 2 diabetes, says Eri Sugiura in the Financial Times .

Tate & Lyle says the problem lies with “the lack of nutritional content rather than the processing itself”, and that CP Kelco’s technologies “would help them develop new products addressing this”. The deal will also help grow Tate & Lyle’s footprint in fast-growing emerging markets .

How are Tate & Lyle shareholders reacting?

Tate & Lyle hopes the deal will ensure the combined entity can supply “producers looking to make food that is healthier but still tasty enough to fly off the shelves”, says AJ Bell’s Russ Mould. But the scale of the deal is “clearly making some investors nervous” – large deals “have a nasty habit of destroying rather than creating shareholder value”.

The fact that the deal is being funded through a mixture of debt and cash means it will lead to extra strain on Tate & Lyle’s balance sheet. Much depends on its ability to deliver savings by combining operations, as well as the promised improvements in revenue growth and margins. The deal’s returns “look underwhelming”, says Aimee Donnellan on Breakingviews .

After all, CP Kelco has struggled recently, with its operating profit falling to $62 million in 2023. Even if you add $50 million of expected cost synergies, the $1.8 billion outlay only yields a 5% return , which is “a long way” from Tate & Lyle’s 9% cost of capital. Still, you could argue that CP Kelco is only in a “temporary slump”, and with inflation falling , next year’s return could be near 8%, suggesting the takeover “has at least a path to passing the taste test”.

The deal, combined with the sale of its Primient joint venture, completes Tate & Lyle’s “transformation into a fully-fledged speciality food and beverage solutions business”, says Hargreaves Lansdown’s Matt Britzman. This will enable it to benefit from its close relationships with customers, which “add an element of stickiness to the business”, while leveraging its technical expertise.

A “strong” management team, and a balance sheet “with enough firepower to expand” also give “scope for optimism”. Still, it will take some “knockout performances” for sentiment to shift.

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