Analysis: Tate & Lyle’s CP Kelco acquisition presents risks but could reap big rewards

28 Jun 2024 --- With a history of over 160 years in the food and beverage market, Tate & Lyle has long been a staple in the industry. Even so, last week’s announcement about the company’s plans to buy CP Kelco, a seller of pectin, specialty gums and other nature-based ingredients, for around US$1.8 billion, still surprised some industry insiders. 

These kinds of major acquisitions are few and far between. Share prices dropped following the announcement, highlighting investors’ concerns and reinforcing why such a merger is a delicate balancing act.

Focusing on healthier and more sustainable foods
In its own words, the UK-based company has been “executing a major strategic transformation to become growth-focused” in recent years. In 2010 it dropped its historic sugar business, ending its long association with refined sugar. According to its 2023 annual report, Tate & Lyle wants to be “fuelled by science” and “right at the center of the future of food.” 

For the company, this means making closer inroads into what it describes as growing customer trends for healthier, tastier and more sustainable food and drink, signified in its move to buy CP Kelco. 

The general industry consensus seems to be that the plans are shrewd, but it will require some precise execution for the business to hit its revenue and growth targets and not further worry investors.

Tate & Lyle must also deliver on its promise to successfully consolidate operations.

The company says that combining the two businesses is expected to generate revenue synergies of up to 10% of CP Kelco’s revenue over the medium term, helping underpin the acceleration in top-line growth.Tate & Lyle Innovation Lab: The company is focusing on healthier F&B.

Avoiding major pitfalls
Russ Mould, investment director at investment firm AJ Bell, says companies entering deals that don’t match expectations is often the biggest pitfall for large companies executing agreements of such magnitude.

He explains: “The deal is being funded through a mixture of debt and existing cash, so there is the potential for some strain on Tate & Lyle’s balance sheet. However, the decision to press ahead with a previously announced share buyback program is a sign of confidence on this front.”

“A lot will ride on the company’s ability to deliver the cost savings from combining operations and the promised improvements in revenue growth and margins.”

He warns that management teams often overestimate their abilities in this area and that the company must be aware of this to avoid disappointing investors.

“At least Tate & Lyle is buying a business it knows well, having collaborated with it over a long period. That might reduce the risk that it discovers some skeletons in the cupboard when it takes charge,” he adds. 

Making its intentions clear
Tate & Lyle has made clear in its acquisition announcement its ambitions to strengthen its reach in areas like “mouthfeel” — how food and drink physically feel in the mouth. Mould says this focus might appear insignificant but adds it is a critical and growing area of the industry. 

The company’s sale of its 49.7% stake in food producer Primient for US$350 million earlier this year, coupled with its latest CP Kelco acquisition move, can be seen as the final step in its commitment to be a fully-fledged specialty food and beverage solutions business, according to Matt Britzman, equity analyst at asset management firm Hargreaves Lansdown. Tate & Lyle food scientist combining ingredients: The company sold its stake in food producer Primient earlier this year.

“We like the move, and it adds to our confidence that medium-term revenue targets can be met. Recent trading has been a little soft. Tate’s continued to see reduced demand for some end products and persistent de-stocking by customers. We’re also monitoring the potential impact from new weight loss drugs, though we remain skeptical about whether these will move the dial,” he says in a recent research article.

Room for optimism
Britzman explains that Tate & Lyle’s core business is food and beverage, with small units focusing on European sweeteners and the sugar alternative Sucralose. He believes the core business, specifically solution-based partnerships, could be a key growth driver.

He adds: “This is where it partners with customers to create bespoke solutions to their dietary and nutritional needs. Deeper relationships and closer ties add an element of stickiness to the business and enable Tate & Lyle to leverage its technical expertise.”

Britzman believes Tate & Lyle’s cash flows are strong enough to support some well-timed debt repurchases to bring down interest costs. A renewed focus on specialty ingredients and solutions, a strong management team and a balance sheet “all give scope for optimism,” he says.

The deal is expected to be completed by the end of 2024. Until then, the industry and investors will be watching with great interest. 

By Sade Laja