A merger between Pioneer Foods and unlisted drinks group KWV is thought to be on the cards following the release of a joint cautionary announcement by the two companies last week.
A merger would create a food and drinks company with annual turnover of more than R18 billion and annual earnings in excess of R600 million. Pioneer Foods, which generates earnings in excess of R550m, would be by far the dominant party if the firms merged.
The proposed merger was first mooted in May. A series of cautionary announcements initially prompted speculation that Pioneer intended to sell its Ceres fruit juice unit to KWV. However, last week's joint cautionary has prompted speculation that Pioneer will not be selling anything but will instead acquire all of KWV's portfolio, which is dominated by wine and brandy products.
The common link between the two companies is PSG-controlled Zeder Investments, which has a stake of just less than 40 percent in KWV and a stake of 32 percent in Pioneer. Despite its dominant holding, Zeder will have to price the transaction very carefully to secure the necessary support from the minority shareholders in both Pioneer and KWV.
A source close to the transaction said yesterday that while a merger made sense from the perspective of KWV gaining access to Pioneer's greater distribution capacity, the pricing would have to reflect the bullish outlook for KWV's earnings.
At KWV's annual general meeting last week it was revealed that the group's headline earnings had moved from a loss of R30.3m in financial 2009 to a profit of R51.3m in 2010. The board also announced the appointment of four new brand directors - two of whom have come from Distell and a third from Coca-Cola.
Chris Logan of Opportune Investments said that it was clear that the KWV board was intent on growing the business. KWV, which had been a co-operative set up by statute, was now focusing on a more dynamic growth path and already achieving rises in market share.
At the annual general meeting the board said it was targeting a return on equity of 15 percent by 2014 compared with the 4.6 percent achieved for the year to June 2010.
KWV is priced at about R11.50 a share over the counter. While this is a significant discount to its net asset value of just less than R19 a share, the source close to the deal said it was an attractive rating relative to KWV's historic earnings.
Apart from pricing, a possible challenge for the deal is the difficulty in combining the basic food products of Pioneer's portfolio with alcoholic drinks.
"On paper the merger might look good but it could be extremely hard to get sales, marketing and distribution teams that focus on bread and cereals to commit to promoting brandy and wine," an analyst said.
There was also the risk that the Pioneer management, likely to dominate any merged entity, might not be as passionate about wine and brandy as the KWV management was.