Tate & Lyle buys healthy food competitor – how did markets react?
Food ingredients group Tate & Lyle has scooped up a competitor to benefit from growing demand for healthier food
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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.
He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.
Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.
As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.
Follow Matthew on Twitter: @DrMatthewPartri
-
Where are ISA savers and investors putting their money?
With less than three months until the end of the tax year, where are ISA savers and investors putting their money? We look at the latest ISA trends.
By Katie Williams Published
-
More than £53 billion held in fixed-rate cash ISAs will mature by April - where should savers move their money?
If your fixed-rate cash ISA is maturing soon, we look at the options available to you
By Ruth Emery Published
-
Why Wise could be worth a lot more than its share price implies
Foreign-exchange transfer service Wise has the potential to become the Amazon of its sector – here's why you should consider buying this stock now
By Jamie Ward Published
-
Can The Gym Group pump up your portfolio?
Gym Group was one of the best UK small-cap stocks in 2024 and will beef up your profits this New Year
By Rupert Hargreaves Published
-
MoneyWeek's five predictions for investors in 2025
MoneyWeek's City columnist gazes into his crystal ball and sees five unexpected events in store for investors in 2025
By Matthew Lynn Published
-
How buy-and-build stocks deliver strong returns
Bunzl, DCC and Diploma became successful through buy-and-build – rolling up dozens of unglamorous businesses. How does it work and what makes it successful?
By Jamie Ward Published
-
Singapore Technologies Engineering shows strong growth
Singapore Technologies Engineering offers diversification, improving profitability and income
By Dr Mike Tubbs Published
-
Why undersea cables are under threat – and how to protect them
Undersea cables power the internet and are vital to modern economies. They are now vulnerable
By Simon Wilson Published
-
Warren Buffet invests in Domino’s – should you buy?
What makes Domino's a compelling investment for Warren Buffet's Berkshire Hathaway, and should you buy the UK-listed takeaway pizza chain?
By Dr Matthew Partridge Published
-
UK equities are set for a bull market – buy now
Investors shouldn’t wait for a crisis to buy UK equities, says Max King. Do so now, in the expectation of much better returns in due course
By Max King Published