Zambeef (LUSE: ZAMBEEF) announced that it is set to sell its Edible Oils unit ‘Zamanita’ to Cargill Holdings BV in an all-cash deal for K167 million ($25.7 M). The cash sum will be adjusted for estimated closing working capital less estimated net financial debt. The deal is scheduled for completion at the later of 1 May 2015 or first day of the month following the satisfaction of conditions of the transaction. Pangaea Securities is the sponsoring broker and adviser on the deal. Zamanita is one of the largest edible oils plants in Zambia with a crushing capacity of 100,000 MT of oil seed.
Zamanita was purchased for K57.5 million ($16 M) in 2008 with a view to complementing Zambeef’s range of basic foods retailed through its network and the by-product of feed cake would supply the stock feed segment. At the time, Zamanita owned the only solvent extraction plant in Zambia – giving it a crucial edge over any domestic competitors. Six years down the line, the segment is being sold. Here is why:
Here is a look at Zamanita’s performance in terms of revenue and gross profit over since acquisition:
Zamanita seemed to have been taking one step forward and 2 steps back over the last six years. Revenue and gross profit were at all-time highs of K370 million and K102 million, respectively, in 2013 but both had double digit declines in 2014.
Profit after tax paints an even worse picture:
Zamanita, as a standalone entity has lost money in four of the six years since acquisition with the worst being in 2012. The main reasons for Zamanita’s inconsistent performance by year were as follows:
No longer a strategic fit
Over the last six years, there has been an influx of domestic as well as foreign (imports) competition, with many cooking oil products selling significantly below the retail price of Zamanita’s cooking oil – pitting tremendous pressure on margins. However, the Government did increase duty on imported edible oils by 159% in the 2015 National Budget which, coupled with the reduction in fuel pump prices should provide a significant boost to Zamanita for new owner Cargill.
Zambeef also sees oil seed crushing as highly specialized, Capital Expenditure (CAPEX) heavy and subject to commodity price and forex volatility – 2 things which have hurt their earnings recently as well as over the last few years.
Where this deal leaves Zambeef
Zambeef closed financial year 2014 highly geared at 56% with a significant amount of US dollar denominated debt. The sale of Zamanita will alleviate Zambeef of K169.4 million ($27M) of debt and obligations to Standard Chartered Bank (will be taken on by Cargill). Furthermore, they could use cash from the deal to reduce their exposure to US dollar debt – something which was talked about in the chairman’s statement from the 2014 annual report.
Shareholders will be happier (whether or not they receive a special dividend as a result of this deal) because there was an argument to be made that Zambeef was overly-diversified. The deal will give Zambeef more latitude to divert CAPEX funds to the core of their operations (protein) as well fast-growing segments like West Africa, Dairy, Leather etc. which had year-on-year revenue growth of above 20% in 2014.
Trying to decipher this puzzle that is Zambia by using a variety of publicly available data (structured and unstructured) in conjunction with my own skill/experience. * * *