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Why Pepsi’s Pioneer Foods deal is not so sweet

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PepsiCo’s proposed buyout of Pioneer Foods is not in the best interests of long-term Pioneer Foods investors. PepsiCo can sweeten the deal by reducing its targeted stake to just over 50%, and to let Pioneer Foods continue its journey on the JSE.

Jannie Mouton, the founder of the PSG Group*, is renowned for never having sold a single share in the group and those in which PSG is invested. But Pepsi’s R110 per share offer for Pioneer Foods, which has already been accepted by the PSG-controlled Zeder Investments, is meant to change this.

PSG should hold on to its now-retired founder’s tradition and not part with its stake in the food producer, held via Zeder Investments. A better deal at Pioneer Foods would allow current investors to remain on board as shareholders, and for PepsiCo to only acquire a significant stake in the business.

Zeder owns 28.8% of Pioneer Foods, and as such, is the single largest investor in the food producer. Its decision will most likely determine whether PepsiCo has its way and takes over the JSE’s second-largest food producer. PSG controls more than 43% of Zeder’s stock. PSG also controls another 4% of Pioneer Foods through Dipeo Capital.

While PepsiCo’s R24-billion offer for Pioneer Foods is a welcome and badly needed foreign direct investment into South Africa, it is an opportunistic move that seeks to take control of a quality business at the bottom of the market. Certainly, a 56% buyout premium is nothing to scoff at.

But it must be noted that the R110 per share offer is only half the R204 Pioneer Foods shares topped late in 2015.

This offer price fails to take into consideration the potential of Pioneer Foods, and its strategic importance not only to SA’s food security, but also Pioneer Foods’ strong income-generating ability.

South Africa has already sold to foreign investors key and strategic companies such as technology group Dimension Data and sugar producer Illovo. While those provided a much-needed injection of foreign currency at the time, the deals took key assets away from local investors, who are now unable to benefit from the upside.

In the long term, the net result of such investments is a negative cash outflow as dividends are repatriated to the owners of the companies overseas.

The best deals, in my opinion, are those in which the foreign investors come in to partner with local investors and allow the companies to remain on the stock exchange. Examples of this are Vodafone Group’s acquisition of a majority stake in cellphone group Vodacom, Walmart’s investment in retailer Massmart and Industrial & Commercial Bank of China’s acquisition of a 20% holding in Standard Bank.

Of course, not all of these have delivered the superior returns they were meant to, but the companies remain the cornerstone of local investment portfolios.

Others, such as the private equity buyout of Edcon, were complete disasters.

In the case of Pioneer Foods, neither PSG nor Zeder need the cash. I do not see where they may wish to deploy the funds that would generate better returns than the food producer does. At any rate, PSG has always been able to raise funds from its investors when such opportunities presented themselves.

Smart investors don’t, and should not sell good companies. The family silver should never be sold. Certainly not at a giveaway price such as PepsiCo is trying to achieve. Minority investors should push against a deal that seeks to lock them out of such a strategic national asset. Pioneer Foods must be allowed to continue to fortify investment portfolios on the JSE.

Selling off your best investments is not the most sustainable way of doing business. BM

*Mantshantsha owns shares in PSG.

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