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Rainbow's acquisition would be good for business

Rainbow Chicken's (RBW) acquisition of Foodcorp will enable the group to broaden its range of brands and categories to counter the cyclical nature of the food industry and become a food player with significant scale‚ Rainbow Chicken's CEO Miles Dally said on Wednesday, 14 November 2012.
Rising commodity prices‚ inflation and surging chicken imports from Brazil have put pressure on local poultry players forcing them to look at other avenues of growth.

Rainbow‚ which is SA's largest processor and marketer of chicken‚ on Wednesday announced that it planned to buy a 64.2% stake in Foodcorp‚ which is SA's third-largest food producer‚ for R1.037bn.

"We have been positioning ourselves for some time now to look for other branded opportunities outside of the poultry area‚" Dally said.

Rainbow is a 73.4% subsidiary of Remgro (REM)‚ the investment holding company of the Rupert family.

Jiten Bechoo‚ equity analyst at Avior research said the acquisition was a good diversification away from the "bleak" prospects of the poultry business.

"The fast moving consumer goods (FMCG) nature of Foodcorp lends to some defensiveness in the company [Rainbow] going forward. Over the long term‚ I could see this Foodcorp acquisition creating value for shareholders‚ and for Rainbow as a whole as it changes their value creating ability. I'm definitely more positive now on the value that the share is offering at current levels‚" he said.

Foodcorp's range of products includes Yum Yum peanut butter and Ouma Rusks. The company also manufactures and sells convenience‚ ready-to-eat products for Woolworths and other retailers.

"Foodcorp is a significant private label manufacturer‚ and private label penetration in the country is on the up given that consumers are buying down on a secular basis in the food and beverages categories.

"Foodcorp also has a branded consumer basket and obviously the products are fairly highly commoditised and they face competition with the likes of Pioneer foods and Tiger Brands in the bread‚ flour and grocery space so the prospects there are not as good‚ offsetting perhaps the private label goods prospects‚" Bechoo said.

Rainbow will conduct a rights offer‚ fully underwritten by Remgro‚ to contribute funding for strategic growth opportunities including the Foodcorp transaction.

Foodcorp's revenue for the year ended August 31 amounted to R6.9bn.

In August‚ Foodcorp said it would spend R46m to build an 8‚000 square metre factory at Molteno in the Eastern Cape. The new plant will enable Foodcorp to take on its listed rivals AVI (AVI) and Pioneer Foods (PFG) in the biscuit category. Manufacturers of branded goods have come under pressure as rising costs continue to eat into consumers' wallets.

Looking ahead‚ Dally said the acquisition would give Rainbow a "broader basket"‚ which made it a lot easier to pursue opportunities in Africa.

The acquisition is subject to conditions‚ including approval by the competition authorities.


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