Should ABF acquire the rice business of troubled Grupo SOS ? - February 10, 2010

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SOS' branded rice business, leader in Spain and Holland and fast -growing in the US, could provide Associated British Foods with a well -priced opportunity in an adjacent business, attractive underlying margins and a stronger platform for its US business. Ebro Puleva is the obvious counter -bidder.

Financially troubled SOS needs to raise cash soon ...Grupo SOS suffered losses in 2008, principally caused by an impairment provision on financial instruments of nearly € 200 mln. Additional write -downs in 2009, caused inter alia by restructuring of its Mexican operations, are likely to cause further losses.

Given that rice is clearly a core business for SOS (see chart), its divestment looks very much like a distressed sale, to allow the group to pay down some of its debt burden, in excess of € 1 bln.

... so opportunity for the right buyerSo there could be an opportunity for a buyer to acquire a strong business, at an attractive valuation; so long as that buyer also has strategic rationale for being in such a challenging sector.

SOS has a strong rice business ...SOS Arroz is the no.1 branded rice player in both its homeland Spain, under the legacy SOS brand; also in Holland under the Lassie brand, acquired from Sara Lee in 2006.

It's also a leading rice player in the fragmented US market, after the acquisition by SOS of American Rice International (ARI) in 2004. The owner of several regional rice brands in that country, ARI doubled its sales, focusing on the Blue Ribbon brand, through distribution reach efforts in 2008.

... resilient to commodity price increasesThe strength of this business is also demonstrated by the fact that, in spite of major raw material cost increases in 2008, SOS Arroz still managed to increase its operating profit margin, to nearly 7%, in that year. That illustrates its pricing power in its main markets.

ABF well placed financially and strategically ...We believe that, given its cash -buyer status but also in view of strategic fit, ABF could be well placed to make this acquisition.

... a good financial story ...ABF, with a net debt ratio of only x1 EBITDA and plenty of headroom in its existing facilities, is well poised to acquire any asset, of the size of SOS Arroz, that's the subject of a distressed sale.

In terms of financial impact to its operations; with annual revenues of about € 325 mln in 2008, the business for sale would add 5 -10% to ABF's grocery business' top line.

Also, with an EBITDA margin of about 7% in that year, SOS Arroz performs roughly in line with ABF's grocery division as a whole.

(N.B. We use 2008 as reflecting underlying values. 9M 2009 saw a slight decline in sales and a major decline in EBITDA, but we attribute that to the financial problems of Grupo SOS, as well as to restructuring costs at its Mexican operations which are not part of this divestment).

... an adjacent grocery category with familiar characteristics ...In terms of strategic fit, packaged rice is arguably adjacent to existing core categories for ABF.

It's as grainy as bread, has the same commodity backdrop as sugar, and is as easy to manufacture as tea (prepare it, pack it and market it).

It also doesn't require major capex; SOS invested less than € 10 mln in its rice business in 2008.

... enhancing its US roll out ...This deal could also provide a boost to ABF's US operations. The leader in that market in premium vegetable oil (Mazola), and in herbs and spices (Tone's, Spice Islands and Turkee brands), ABF could benefit from the extra logistics and sales platform that ARI would bring.

... with some innovation upsideFinally there's the innovation story. Counter -intuitively perhaps, rice has significant potential; not only new varieties and mixes and ready-to-eat concepts, but also, wait for it, functional rice.