JSE-listed Clover Industries’ share price shot up as much as 18% on Friday after the company reported it is in negotiations with a third party for its potential acquisition.
Tough trading conditions for SA food producers is squeezing margins and raising the prospects of consolidation, analysts said, while Clover may have become more attractive due to progress in its restructuring efforts.
SA’s largest dairy producer, which has a market capitalisation of R3bn, is in the midst of a pivot from its core dairy business to focus on value-added products, as well as nondairy food products such as olive oil.
The interested party is unlikely to be Tiger Brands, which has its own share of problems and is trying to bring down the number of products already in its portfolio, said Ron Klipin, portfolio manager of Cratos Wealth.
Interested parties could include Zeder, which may be looking to diversify from its holdings in Pioneer Foods, he said.
Clover is likely to be attractive to private-equity investors, including through its focus on value-added products and becoming less exposed to raw milk sales, which are highly cyclical in nature.
“Clover management has done the right things in terms of restructuring the business, making it more appropriate to current market conditions,” Klipin said. Consolidation in the sector should be expected, and many food producers continue to see their margins squeezed as they absorb costs rather than fully passing them on to consumers, he said.
Vunani Securities small and mid-cap analyst Anthony Clark said it looks as if a private-equity deal could be on the cards, as no other local food stocks are under cautionary.
“It wouldn’t be Danone or Parmalat as they are both in this country,” said Clark. That left Nestlé, or a private-equity player.
The former may have had talks with Clover a few years ago, said Clark.
In September, the group reported its first loss in more than a decade after writing off a loan to its recently unbundled subsidiary, Dairy Farmers of SA (DFSA), of which Clover holds 26%.
Clover took a R439m hit, which then equated to almost 17% of its market capitalisation, but maintained that this write-off of debt is an accounting measure and masked underlying improvements in its performance, CEO Johann Vorster said at the time.
The company reported a surge in its normalised earnings per share, as the company recovered from the effects of drought conditions. Revenue has fallen 17.4% to R8.3bn, but risen 7.9% when adjusted for the DFSA restructure.
Clover’s share price closed 18.44% higher at R16.70, having risen 27.48% so far in 2018.