Implications of Proposed Acquisition of Honeywell Flour Mills by Flour Mills of Nigeria


Monday, November 22, 2021 03:42 PM / by FBNQuest Research/ Header Image Credit: Fast Casual


Event: Flour Mills of Nigeria Plc (FMN) has notified the Nigerian Exchange Group (NGX) of its plan to acquire a controlling stake in Honeywell Flour Mills Plc - HFM (not covered). The company disclosed that it plans to acquire Honeywell Group's 71.69% stake in HFM and FBN Holdings' 5.06% stake in HFM. On completion, FMN's controlling stake in HFM will reach 76.75%.


Implications: Plant capacity is a significant indicator of a company's market share in the milling sector. Therefore, using industry capacity as a proxy, the combined entity will be the second largest miller in Nigeria, with an estimated capacity of 9,600 MT/d, behind Olam's 11,140 MT/d. Since it entered the Nigerian (and West African) market in 2012, Olam has preferred acquisitions as a strategy to increase its competitive position, emerging as the largest miller after it acquired Dangote Flour Mills (DFM) in 2019.


Based on our estimates, Olam has an industry market share of 44%, ahead of FMN's current estimate of 32%. With the completion of the acquisition, FMN's market share will rise to c.42%. We note that BUA Flour Mills (1,600MT/d) is currently constructing an additional 2,600 MT/d milling capacity which was to come on stream in 2021, but is now unlikely (will bring its total capacity to 4,000 MT/d). While we believe the transaction has long-term competitive benefits for FMN, we also believe this deal is likely to be earnings accretive as long as FMN can sweat the assets better and derive synergies which are unquantified currently. On an annualized basis, FMN's PBT margin is around 3% compared with just under 1% for HFM.


The final equity price payable will be determined by HFM's "adjusted net debt and net working capital" on the date of completion. Based on HFM's H1'22 numbers, we would expect the acquisition price to be well above Friday's price of NGN3.39, perhaps above NGN5.00/per share. We believe that FMN can comfortably finance the deal, using its robust cash balance of NGN52.7bn (as at H1'22) and would not have to use new debt.


Current industry capacity (MT/d)                                                             

Source: FBNQuest Capital Research estimates


Post-acquisition of HFM (MT/d)                                                 


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