By Chinwendu Obienyi
A recently signed agreement for the business combination of Flour Mills of Nigeria Plc (FMN) and Honeywell Flour Mills Plc (HFMP), a portfolio company of the Honeywell Group (HGL), will go down in history as one of the most significant event in Nigeria’s food manufacturing sector in recent times for several reasons.
For one, the sheer size of the deal is a key reason – as the transaction will see HGL transfer its 71.69 percent stake in HFMP to Flour Mills of Nigeria at a total enterprise value of N80 billion. The last time the market saw an acquisition of this magnitude was in November 2019, when Olam International (owners of Crown Flour) completed the acquisition of 100 per cent equity of Dangote Flour Mills in a N120 billion transaction.
Among other things, this transaction has raised more interest about what this could mean for Nigeria’s food manufacturing sector. Experts have pointed out that the food manufacturing sector is not one that draws concern about monopoly, as it is a space large enough to take in more players than what is currently obtainable.
What in fact, is of concern is the ability of these players to meet Nigeria’s growing demands for food, and possibly exploit the AfCFTA to export food out of the country.
A fast-growing population
The World Bank puts Nigeria’s population at a little over 206 million as of 2020. Yet the country’s population will continue to balloon very quickly. According to the United Nations, Nigeria is among the ten largest countries worldwide, and “growing the most rapidly.” Its population is predicted to surpass that of the United States and become the third largest country in the world shortly before 2050.
A report by PwC also revealed that feeding Nigeria’s current and future population is a critical challenge with the country’s population growing at approximately 2.7 per cent annually as fertility rate of 36.9 births per 1,000 people. Unfortunately, food production is not growing at the same pace.
Given this and a host of other reasons, the concern about food insecurity in Nigeria is growing. For Nigeria, increasing food production and manufacturing at this time and in the near future, is not just about exporting to improve GDP, but being able to feed the population at home and arresting hunger.
Despite having so much arable land, Nigeria’s food production capacity remains insufficient to cater to its growing population. The challenge will become more of the reality going forward.
With the broken agricultural value chain and few big-enough players in the local food manufacturing space, Nigeria is importing heavily to make up for the deficit in food supply. By joining forces, HFMP and FMN will continue in their effort to boost Nigeria’s food production capacity but at a much higher level.
Back to the deal
The FMN merger with HFMP is a significant union – a marriage (if you may) of two leading market players in Nigeria’s food manufacturing space. Between both players, they have over 85-year combined market experience and track record.
One of them, Flour Mills of Nigeria Plc (FMN) comes to this union with its range of grain-based foods, sugar, starches, oils, spreads and breakfast cereals. The other partner – Honeywell Flour Mills Plc (HFMP) comes with its diverse range of carbohydrate products and staples.
About cash flow
Cashflow, they say, is the bloodline of any business, and when it comes to the books, we can see again that both companies are very healthy and have shown impressive and sustained growth in revenue, all in hundreds of billions.
For instance, Honeywell Flour Mills Plc audited results for FY 2020 showed an all-time high revenue of N109.5 billion, a 36 per cent increase from the N80.4 billion posted in the last fiscal year. This is in spite of the COVID-19 pandemic and the associated challenges which businesses generally had to battle during the year.
The company’s Operating Profit grew even faster than revenue at 39 per cent, to N7.6 billion from N5.4 billion recorded in the previous year. These results were attributed to improved efficiencies, increased production and cost optimisation strategies.
Speaking about the transaction, Obafemi Otudeko, the Managing Director of Honeywell Group Limited, said, the announcement is in line with the evolution of Honeywell Group and our vision of creating value that transcends generations.
“For over two decades, we have supported Honeywell Flour Mills to build a strong business with a production capacity of 835,000 metric tonnes of food per annum. Following the transaction, Honeywell Group will be strongly positioned to consolidate and expand its investment activities, including as a partner of choice for investors in key growth sectors,” he said.
For his part, Omoboyede Olusanya, the CEO of Flour Mills of Nigeria, said, the proposed transaction aligns with the company’s vision of not only to be an industry leader but a national champion for Nigeria.
“We believe that this will create an opportunity to combine the unique talents of two robust businesses. As a result, we will have a better-rounded and more comprehensive skill set available to us as a combined diversified food business, thus enabling us to better serve our consumers, customers, and other stakeholders, whilst providing employees with access to broader opportunities.”
Nigeria needs more sustainable and sizable organizations that can withstand strong economic winds that may come. The increased production expected from the emerging entity will bring the economies of scale into play, allowing for cheaper production costs per unit, improved turnover and better profit margins.
Furthermore, consumers stand to benefit from a deal that can possibly reduce the unit production cost and make the business more competitive.
Also speaking on the merger, Ruth Ogwugwuah Okwumbu, a Lagos-based investment analyst, said, “As separate entities, FMN and HFMP were performing well in production and revenue, but as a combined force, they will put their past achievement in the ashes and go all the way up from there. An astronomical growth is waiting to erupt from the marriage.
I think that in the drive towards improving food production and ending hunger, the agricultural and food manufacturing sector should be encouraging, and where necessary, engineer such unions to create bigger players that will have the capacity to invest heavily in backward integration, and improve the agricultural value chain”.
For now, the company which emerges from this transaction will become a national champion in the race against food insecurity.