UK flour set for sea change?
13 July, 2007
Investec analyst David Lang suggests that PE investment in the milling sector will prompt transformation of the industry
Speaking at an event last week to mark flour and ingredients supplier Bowman's 150th anniversary, David Lang, analyst and consultant for Investec, suggested that we may be at the beginning of a sea change that could transform the UK flour industry beyond recognition.
Eventually, milling could become an almost entirely free-market industry, with negligible quoted company involvement, he said. And he put the long-term ownership of three major players in milling - Rank Hovis, Allied and ADM - in question. The "juicy cashflow" available with food companies is virtually irresistible to private equity (PE), and it is likely to be the top bidder for food industries."It might sound a bit far-fetched, but PE has injected an extra, urgent industry dimension," he said. We are in the middle of a takeover boom, with PE offering a massive acquisitions war chest. Some analysts reckon that all publicly traded companies are up for grabs. Now there's speculation that Premier is thinking of hiving off Rank Hovis' free flour trade and the likely winner of any auction would almost certainly be PE."Such a deal would mirror Allied Mills' 2002 sale to ADM and forms a much broader pattern of milling industry change. Premier is focused on high-margin brands, while flour only delivers around 5-6% margin against a backdrop of falling bread volumes. In 2006, Allied Mills re-entered the market with mills in Tilbury and Manchester (it had kept Neills of Belfast). Meanwhile, Allied Bakeries was heading for another loss this year, he said, while owner ABF is prioritising retailer Primark. "There have to be strong questions over how long they are going to stick around in milling and my guess is not forever," said Lang. He also questioned whether flour would survive indefinitely under ADM, saying "the company's direction may be elsewhere"."This could fuel further growth of a vibrant independent milling sector. If Warburtons succeeds in marginalising Kingsmill and halting Hovis, the scene is going to be set for further independent miller growth and rationalisation by the majors."nervousness Also at the event, Alastair Dickie, director of crop marketing at the Home Grown Cereals Authority, acknowledged nervousness in the food industry over the impact of demand for biofuels on raw material prices, but anticipated a 20% rise in world supply of grain over the next four to five years."You will get more grain in the world because the price is up," he said. "This demand event, which is linked to biofuel, is probably going to sustain the base price slightly higher and that is going to give a comfort zone to the agricultural sector. There are tracts of Russia, which haven't grown anything for 10 years, that are going under the plough this autumn. So we will get more grain by 2009." n