Tate & Lyle – Ignominious Dumping For Mr. Cube!

Posted on 1 Jul 2010 by The Manufacturer

Howard Wheeldon questions the logic in Tate & Lyle's sale of its sugar business "for a pittance".

Reducing debt is one thing – selling a company birthright for a pittance to become what management apparently term as something more focussed and less volatile is quite another! Refining sugar might be a pretty hum-drum and boring business using plants that often look as if they were built at the time of the Ark but it has served Tate & Lyle shareholders very well over the past one hundred or so years. Better still, it has and continues to generate oodles of cash. I wonder what on earth Mr. Cube (the sword brandishing free enterprise symbol of Tate & Lyle born sixty-one years ago to fight the threat of nationalisation) thinks about this? The expression ‘not amused’ springs to mind!

As I sit writing this blog in BGC Partners’ main London offices here in Canary Wharf, I am reminded that it was the unloading of and movement of unrefined sugar that created much of the original wealth of this whole area. Back to Tate & Lyle though and while it is true that these days there are a host of other sweetener products on the market and the food industry uses a far greater amount of artificial based sweetener product such as sucralose than they once did, this should not mean sugar has an indeterminate future. Indeed, while sugar may have lost some of its former sweetness in recent years in terms of growth availability, quite clearly unless this purchase is aimed at eventually closing UK based sugar refining activities, American Sugar Refining who are buying the Tate & Lyle sugar interests for the miserly sum of £211m in cash are taking the view that this is a business with a good future. I’ll bet that Mr. Cube thinks that too!

We are told that the proposed sale will allow the new Tate & Lyle to concentrate on other speciality food ingredients. Fair enough but should this pose the question whether the company is replacing what it called volatility with maybe additional risk? As an imported commodity based product it would be wrong not to admit that the traditional sugar cane (as opposed to domestically grown sugar beet) which Tate & Lyle relies solely for its refining business is subject to a host of potential seasonally related problems such as quotas, potential for storm and hurricane damage to the original crops, pricing and competitive issues particularly against beet, increasing transport costs plus no doubt many other factors. That’s just getting the product to the refinery before distribution and sale of the end refined product. No argument about volatility then. Refining sugar is a highly competitive industry and one that faces stiff competition from domestic beet sugar producers and it is also fairly labour intensive. Finally, there are I believe specific EU quotas on the amount of cane that can be imported.

So it is very difficult and complicated business to run. But what I can’t quite get my head round is that despite some reasons that might just make Tate & Lyle an easier company to run, selling a mature and yet still high cash generating if volatile business, what makes management so certain that concentrating efforts on growing the speciality food ingredients will be any less volatile or potentially high risk than sugar refining? Is this a case of jumping from the frying pan into the fire? Indeed, should this be a case of better the devil you know? I have nothing against the overall strategy of Tate & Lyle to develop other businesses but it is just that I can’t quite understand the reason behind ditching a business for a price as small as this and that generates useful cash?

Meanwhile I readily admit to having no idea whether products for glazing cereal products and crisps is any better or worse in terms of potential for real margin growth than the refining of sugar. But I do remember when FH Tomkins bought Rank Hovis McDougall as a food diversification all those years ago and lived to regret it. Other food producers haven’t exactly done that well in recent years either. I guess also that as far as speciality food ingredients are concerned it will always depend on the amount of value added available, whether you have stand alone technology, something that no-one else has and that makes the whole idea work and maybe how close you are to the actual food producer. The belief appears to be that the global market for speciality food ingredients is worth around £20bn and is growing at 5% per year. Not bad but not that great either and with food health pretty high on the agenda of a great many mature western countries and the removal of additives, salt and sugar one does begin to wonder!

Call me old fashioned if you like but a strategy that says take £211m in order to shave just a little off £800m net debt doesn’t really make that much sense with interest rates currently so low. Still there we are – the die on this one looks cast. Why though did this proposed sale not occur when Sir David Lees was Chairman I wonder (he was replaced by Sir Peter Gershon last October and a little later. Mr. Javed Ahmed succeeded Iain Ferguson as CEO). The answer of course is that in a previous guise years ago as Finance Director, later CEO and Chairman of GKN Sir David Lees knew the value of generating cash. Come on Mr. Cube wake up!

Howard Wheeldon is senior strategist for brokers BGC Partners