In the “latest swoop by private equity on a British company”, Tate & Lyle (T&L) has agreed to sell 50% of its “primary products” division to private-equity group KPS Capital Partners for $1.3bn (£940m), says Hannah Boland in The Daily Telegraph.
The division makes corn-based sweeteners and industrial starches, and currently accounts for most of Tate & Lyle’s £2.9bn annual sales. While Tate & Lyle will own half of the equity in the new company, KPS will have board and operational control of the venture.
The deal may look like a typical buyout firm “slash and burn”, but in reality it is a “creative carve-out”, says Lex in the Financial Times. This is because it allows Tate & Lyle to separate out a part of its business that has consistently delivered lower margins than the two other parts of the firm.
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In fact, there is some evidence that the division is the reason why Tate & Lyle trades at a lower multiple of earnings than its rivals. At the same time, Tate & Lyle will “maintain some connection” with its primary products unit through its 50% stake, allowing it to make more money if a full sale follows.
Potential ignored by public markets
Still, it is hard to escape the conclusion that once again a buyout firm has been able to spot the type of value that “is often ignored in public markets”, says Ashley Armstrong in The Times. While Tate & Lyle’s primary-products division might have delivered “sluggish growth”, the board really should have been able to get a better price given that it “still has £1.3bn of assets, is profitable and generated £1.7bn of sales last year”.
It looks as though KPS will emerge from the deal with a hefty profit once it applies some “ruthless cost-cutting”, followed by a relisting “with a new name and valuation”. There’s no denying that KPS seem to be getting a “tasty deal”, says Dasha Afanasieva on Breakingviews. The transaction values the Tate & Lyle unit at five times its trailing Ebitda, “well below rival Ingredion, which trades closer to nine times”.
Nonetheless, the deal could prove good news for Tate & Lyle too, as the newly debt-free group will now be in “a strong position to boost growth through mergers and acquisitions”. Ultimately, the success of the restructuring will depend on whether CEO Nick Hampton can boost margins in the remaining ingredients business.
While Tate & Lyle plans to return £500m of the money raised from the deal to shareholders through a special dividend, the rest of the money will be used to “strengthen the balance sheet and invest to accelerate growth”, says Deirdre Hipwell on Bloomberg.
Hampton is particularly keen for Tate & Lyle to harness growing demand from consumers “for food and drinks that are lower in sugar, calories and fat, and contain added fibre”. He believes that such investment is urgent as the pandemic has greatly accelerated demand for healthier food and drink.
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