Although the South African potato processing industry is growing rapidly to meet increasingly strong demand fuelled by the brisk growth in food services and the convenience market, JSE-listed Famous Brands says it lagged its peer industries in developed countries, illustrating the growth potential for the company’s newly acquired Lamberts Bay Foods (LBF) business.
“If you look at the food service environment around the world, anecdotal data suggests that about 80% of all meals in first world economies are consumed outside the home or bought outside the home,” pointed out branded food service franchisor Famous Brands group strategic adviser responsible for merger and acquisition activity Kevin Hedderwick.
In South Africa, this number is between 30% and 35%. “So, you can see the size of the potential,” he told Engineering News Online, noting that for every 1% growth in gross domestic product, there was a 2% growth in food services. “The more people move towards convenience; the more French fries you have to produce.”
Famous Brands announced on Thursday that it had acquired LBF, a wholly-owned subsidiary of JSE-listed Oceana Group, and expected the acquisition to make an important contribution to achieving Famous Brands management’s audacious operating profit target of R1-billion by February 2018.
Hedderwick noted in Thursday’s statement that acquiring LBF was a major coup in terms of advancing the group’s stated goal to build capability and capacity across its logistics and manufacturing supply chain operations.
“This acquisition not only affords us security of supply of a key strategic menu item for our franchised network [but] also provides us with an existing food services and retail customer base, which has significant expansion potential over time.”
Hedderwick said Famous Brands would look to integrate the requirements of its brands that were not using LBF products into LBFs business, while exporting LBF products to neighbouring countries in future could be an option.
However, there were markets that could not be exported to, although the exchange rate may make it attractive to do so, owing to barriers to entry, such as levies on chips and antidumping protection tariffs, he explained.
LBF currently processed French fries and other value-added potato products solely for the South African market at its factory in Lambert’s Bay, in the Western Cape, for sale to wholesalers, retailers and restaurant chains. The company, one of only three French fries manufacturers in South Africa, had supplied product to Famous Brands for the past 20 years.
Currently, LBF processed some 24 000 t/y of potatoes, which were sourced mainly from Mpumalanga, Limpopo, the Free State and the Sandveld region of the Western Cape. Long-term relationships with growers close to Lambert’s Bay were one of the business’s key strategic advantages and accordingly, an ongoing development initiative.
Oceana CEO Francois Kuttel stated that the company’s motivation for the transaction with Famous Brands was its tacit recognition of Famous Brand’s ability to maintain and grow LBF in line with its core business.
“The acquisition strengthens LBF’s potential for growth and enhances the long-term certainty of product offtake that only a company of Famous Brands’ market leading position can provide. I am confident that the future of the business is in very good hands and that LBF will continue to expand under Famous Brands’ expertise. This transaction enhances the long-term job security of the staff as well as the positive impact that the business has on the Lambert’s Bay community.”
Hedderwick added that Famous Brands’ objective was to ensure continued quality and consistency of product for all of LBF’s customers, noting that the existing operation had a good record of accomplishment and was well respected and supported.
“The plant integrity and condition is exceptional, and, while we have identified opportunities to enhance and upscale the business, there is no intention to move the facility, or alter arrangements with LBF’s employees or growers. They are key contributors to the success of LBF and we look forward to welcoming them into our group.”
The transaction was subject to Competition Commission approval, whereafter all suspensive conditions would have been fulfilled.
The purchase consideration fell below the threshold of a categorised transaction in terms of the listings requirements of the JSE and would be settled from cash reserves.