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Tate & Lyle is one of the oldest companies on the UK stock market. But in recent years it has changed beyond recognition. It quit sugar in 2010. It has since divested its commercial sweeteners arm. It is now going strong with the $1.8 billion acquisition of CP Kelco, an American specialty ingredients maker, from family business JM Huber. The 11 percent drop in the share price on Thursday is a sign of investor nerves about the scale and quality of the deal.
There is a logic to the acquisition. CP Kelco’s range of pectins, gums and other naturally derived ingredients complement Tate & Lyle’s own products. They are especially focused on improving the “mouthfeel” of low-fat or low-sugar products. Making processed foods healthier may seem like an oxymoron. But the $19 billion market for this type of high-margin food ingredient is growing at 6 percent annually.
This is a rare large purchase by a UK-listed company in the US. The deal adds about 30 percent to Tate & Lyle’s revenue. Net debt/ebitda will increase to 2.3 times, thanks to the cash payment of $1.15 billion. JM Huber, one of the largest private companies in the US, will get 75 million shares of Tate & Lyle and plans to be a long-term holder of its 16 percent stake.
The expansion isn’t cheap: The deal values CP Kelco at about 14 times its 2023 ebitda. After $50 million in annual cost savings, this figure drops to about 10 times. This is lower than peers such as Kerry Group, which trades at 13 times, but well above Tate & Lyle’s multiple of 8.5 times.
The timing, however, seems reasonable. Some of the air has left the sector’s valuations thanks to weight-loss drugs and a backlash against processed foods. Food ingredient manufacturers have long traded at a 10 percent discount to the specialty ingredients sector. The valuation gap has widened to 30 percent over the past year, according to Barclays analyst Alex Sloane.
CP Kelco’s recent poor financial record is a major concern. Its ebitda margins fell by a quarter, to 17 per cent, in the two years to 2023. Half of that relates to supply chain disruption associated with a capital investment programme. The remainder is attributed to inflationary pressures, post-pandemic inventory drawdowns and customer belt-tightening.
Tate & Lyle, a long-time partner of CP Kelco, is confident it can turn the business around. But the expected departure of Chief Financial Officer Dawn Allen, who will move to Haleon in October, is a complicating factor. Integrating a large, underperforming company will be a big task for his successor.