For months market watchers have commented on the fact that South African stocks are trading well off their highs and pockets of value are beginning to open up, but now it seems others are beginning to notice too.

US-based PepsiCo, the second-largest soft-drink maker in the world, has made an offer to acquire 100% of Pioneer Foods, the producer of Sasko bread, Weet-Bix, Pro-Nutro, Spekko rice and White Star maize meal. It is the second-largest food producer in South Africa, after Tiger Brands. PepsiCo has offered R110/share which equates to about $1.7-billion, a premium of 56% on the average share price in June and July.

This is the second offer this year by an international firm for a local food company. In February a consortium, led by Tel Aviv-based Central Bottling Company, made an offer to acquire the entire issued share capital of Clover for R25 per share.

Business Maverick noted recently that there is value to be had on the JSE, in this article. The value is specifically in the shares of domestically focused companies, and oft en at the smaller end of the market, says Wilhelm Hertzog, portfolio manager at Rozendal Partners.

This has already resulted in a fair amount of buyout activity on the smaller end of the market, often with founding shareholders or insiders with a long history of involvement in the companies being involved, he says. Some names that come to mind are Howden, Verimark, Torre, Trans Hex and Ingenuity.

However, for the first time in a while, international firms are casting their eyes over SA stocks. Possibly this is because valuation multiples in the global food and beverage indices are very high after a decade of re-rating post the global financial crisis, while South African multiples look cheap on a relative basis, says Hertzog. “Whether they’re cheap in absolute terms I’m not so sure of.”

Veteran retail analyst Syd Vianello tweeted: “Don’t be surprised if more clever foreigners buy SA assets on the cheap. For PepsiCo $2-billion is a pittance, they also need milled maize to make some of their snacks and clearly Simba has delivered outstanding returns over the past 20 years and taught them a lot about SA.”

It is worth noting that valuations on SA-focused stocks may be cheap for a reason. Food producers (and retailers) have had to operate in a very challenging environment in the last 18 months. Input costs have risen sharply, but a constrained consumer makes it very difficult to recover costs fully.

“The sector has underperformed, and even if we exclude idiosyncratic issues of each company like listeriosis at Tiger brands, there has been a decline in earnings across most of the counters,” says Mpande Maneli, a portfolio manager with Argon Asset Management.

This has been exacerbated by growth in penetration of private label market share in South Africa, and competition stiffening with price discounting becoming commonplace.

However small-cap analyst Anthony Clark believes that while the offer price comes at a hefty premium to the volume weighted average price before the cautionary was published, it is going for a steal.

“Pepsi has offered a good price, but look at the offer in the context of where the company has come from (R202.20 in October 2016) and where it could go. This is the lowest point in the earnings cycle, and an earnings recovery is expected in the 2020/21 financial year. We are selling the family silver on the cheap.”

The deal has the backing of Pioneer’s largest shareholder, the PSG Group controlled Zeder Investments which owns 28.23%. The joint PepsiCo and Pioneer Foods Sens statement noted that shareholders holding 52.85% of ordinary shares will vote in favour of the scheme.

Those who remember their history will know that Zeder gained its controlling stake in Pioneer Foods in an acrimonious bid for over-the-counter-listed Agri Voedsel in 2014 at R99.00 a share, recalls Clark. In the five years since that offer, using (then) much higher Zeder rated paper to do the share swap, Zeder shareholders have gotten back an extra R11.00 a share (plus the associated dividends accumulated) for five years of owning Pioneer Foods. “Hardly a slam dunk investment as the Americans would say.”

Whether the deal is a steal or not, depends on who you talk to. For the parties concerned, there is value to be unlocked.

Pioneer management believes the deal will open doors previously unopened for the company. “As part of PepsiCo, we will have greater scale to expand our leading brands, greater capital to invest in local agriculture and people, greater access to leading global capabilities and a partner committed to taking our company to greater heights,” says Tertius Carstens, CEO of Pioneer Foods.

PepsiCo has historically focused on the soft-drinks and salted snacks business, but has diversified into cereals and cereal snacks, pasta meals and couscous en route to becoming a global leader in convenience foods and beverages.

“Pioneer Foods represents a differentiated opportunity for PepsiCo and allows us to immediately scale our business in Africa,” says PepsiCo chairman and CEO, Ramon Laguarta. “[It] forms an important part of our strategy to not only expand in South Africa, but further into sub-Saharan Africa as well.”

In many respects, says Clark, the two are a good fit. “Pioneer Foods has a complementary beverages business which generates about 15% of group revenue. PepsiCo owns the giant Tropicana juice business, which it bought in 1998 for $3.3-billion so there is excellent juice experience in PepsiCo.”

Further, PepsiCo bought Quaker Oats for $13.8-billion in August 2001, largely for the giant sports drink, Gatorade.

“So, PepsiCo with its beverages, cereals and snacks business does have a linkage into the Pioneer Foods basket of Bokomo, but there is a lot of Sasko and Bokomo that is very un-PepsiCo.

“The combination of the two will be a powerful entity now in South Africa,” he says. Pioneer will have the scale and resources to compete against the local and international food giants and its own portfolio will be augmented. And PepsiCo, whose drinks business has gained little traction in Africa (the Pepsi SA business is owned by a local private equity entity), must relish the idea of products with as much traction in Africa as Liqui Fruit and Ceres have.

The deal is subject to approval of shareholders as well as the competition authorities, and is expected to conclude early in 2020.BM