The increased merger and acquisition activity experienced in the South African agri sector over the past few months could only be the beginning of a bigger industry consolidation process.
This can be taken from statements made by Bertie Hamman, a senior manager at Standard Bank’s AgriBusiness division.
Hamman said the South African agribusiness landscape is likely to see a surge in corporate actions over the next two years. This will result in greater economies of scale in a sector that is currently characterised by fragmentation and relatively low operating margins, compared to other industries.
Hamman comments come amid increased corporate activity in the sector as reported on this platform ujuh.co.za. Our reports have stated that the South African agri sector has regained extraordinary attention in recent times largely due to the drumming up of the theme; food security and the role that can be played by the African continent. South Africa is seen to have great potential to spark a agri business revolution within the sub Saharan region. This is clearly reflected in activity of major South African companies like Omnia, AFGRI and Zeder.
On the local front companies like Zeder and AFGRI are on the prowl. While AFGRI itself is facing a takeover bid by American investors AgriGroupe.
Hamman said South Africa is probably lagging the global trend by a decade or more but it is definitely seeing increasing consolidation and integration in the sector. This will ultimately result in greater synergies by eliminating duplicated processes in the agribusiness value chain.
“The other benefit of merger and acquisition activity in the sector is that it results in the maximisation of shareholder value due to process optimisation and revenue enhancement initiatives.”
Hamman said one of the reasons behind the increased consolidation in the agricultural sector is the drive by established companies to diversify their revenue streams. This is achieved by adding bolt-on acquisitions that enable them to exploit cross-selling opportunities, or to cover a larger part of the value chain. “As an example, an agricultural group could potentially acquire a road freight company specialising in the transportation of agricultural products in order to reduce the cost of outsourcing this function to an external service provider, while at the same time, enabling them to channel their transportation requirements to their own subsidiary,” said Hamman.
“While merger and acquisition transactions are inherently risky, and transacting parties should adequately account for any potential risk premiums, they do offer substantial opportunities to unlock value for shareholders and other stakeholders in the value chain,” said Hamman.
Agribusinesses supplying to- or buying from grain producers seem to be leading the way in terms of mergers and acquisitions, as larger groups operating in this sector continue to snap up smaller players. This trend will ultimately result in greater vertical and horizontal integration; the extraction of revenue enhancement synergies through cross selling opportunities and economies of scale, as well as the elimination of duplication. Hamman also believes that both the wine and horticultural sectors are likely to experience increased merger and acquisition activity over the next 18 to 24 months as companies seek to combine muscle in order to compete on international markets, including a strong African focus.
Another major South African bank, Absa, has made similar comments recently. Absa Agribusiness Head Ernst Janovsky was quoted saying agriculture continues to be an important economic sector because of its contribution to food supply, the country’s trade balance, employment, supply of raw materials and its value as a market for other sectors.
“It is the right time to invest in agriculture because the Net farm Income (NFI) has increased substantially over the past decade. Property value of farms is expected to continue to grow by 10-12% per year. Debt to asset ratios has improved substantially over the past decade and turnover to debt ratios are constantly improving.”
Janovsky pointed out that for the farmers to survive they needed to become more productive by increasing their output in relation to their input. This is mainly done by improving Storage technology, transport, Information technology, Biological farming practices, Genetic technology and Economy of scale.
“Farming enterprises will therefore continue to grow in size and consolidation will continue within the agricultural industry”.