Flour Mills planned merger with Honeywell: A recipe for monopoly

Chris Uba

On  Monday, November 21,  Flour Mills of Nigeria (FMN) Plc  announced that it had reached an agreement to acquire Honeywell Group. A press statement to this effect said that Honeywell Group Limited had agreed to sell a 71.69 per cent  stake in  Honeywell Flour Mills Plc(HFMP) to FMN, giving the latter the majority stake of Honeywell shares. FMN Plc. currently has market value of N29 billion.

In addition, FMN also entered into an agreement with First Bank of Nigeria Limited (FBNL) to acquire the bank’s 5.06 per cent equity in Honeywell Flour, upon completion of the acquisition.

“For the proposed combination of FMN through its affiliates and Honeywell Flour Mills Plc (HFMP), a portfolio company of HGL. At a total enterprise value of NGN80 billion, HGL will dispose of a 71.69 per cent  stake in HFMP to FMN,” it said. Enterprise Value includes the debt of the company.

The majority of interests in Honeywell  is owned by Obafemi Otudeko, who was controversially removed recently as the chair of First Bank Nigeria Holding (FBNH) when the board of the holding company was sacked by the Central Bank of Nigeria (CBN).

The two companies are heavily indebted, with Flour Mills having a larger share of the debt. The acquisition is aimed at consolidating Nigeria’s food industry, according to the statement.

“The proposed transaction will combine two businesses with shared goals and create a more resilient national champion in the Nigerian foods industry, ensuring long-term job creation and preservation,” it stated.

The total cost of the 71.69 per cent  stake stood at N80 billion. The companies’ press statement further explained that the final equity price per share payable will be determined based on HFMP’s adjusted net debt and net working capital at the date of completion.

“The country and its food security agenda will benefit from both companies’ focus on developing Nigeria’s industrial capability, its agricultural value chain and specifically backward integration of the food industry,” it said.

Per Naira Metrics, Honeywell currently has a debt balance of N78.5 billion and a cash balance of N27.3 billion as of the latest results, while Flour Mills is also debt-laden with about N142.8 billion in debt and N52.6 billion in cash. While it is not clear how the deal was executed, the companies’ debt burden suggests that Flour Mills funded the acquisition from debt.

Honeywell’s large volume of loans is scattered across Nigerian banks, but seems to be all covered by the acquisition.

Based on its last audited accounts for the period ended March 2021, Nairametrics named some of the Honeywell’s and Flour Mill’s loans. They include a N10.4 billion loan from First Bank, N2.3 billion from Bank of Industry, N6.2 billion from Fidelity Bank, and N3.5 billion from Polaris Bank, for Honeywell. Flour Mills on the other hand owes about N50 billion in several intervention loans to Bank of Industry and the CBN, and N68.6 billion in commercial papers and bonds.

Honeywell Group Limited Managing Director, Otudeko said the investment will help the company to expand its production capacity.

Said he : “Today’s announcement is in line with the evolution of Honeywell Group and our vision of creating value that transcends generations. For over two decades, we have supported Honeywell Flour Mills to build a strong business with a production capacity of 835,000 metric tonnes of food per annum.

“Following the transaction, Honeywell Group will be strongly positioned to consolidate and expand its investment activities, including as a partner of choice for investors in key growth sectors.”

The agreement enables Flour Mills to purchase 71.69 per cent stake in Honeywell,

However, Premium Times reported, citing a regulatory filing at the Nigerian Exchange Limited on Monday, that separate pact with FBN Holdings Group allows the Mills to acquire the financial services group’s stake of 5.06 per cent in Honeywell, bringing its consolidated holding in Honeywell to 76.75 per cent.

Based on that, Flour Mills may have a claim over about 6.09 billion units of Honeywell’s 7.93 billion ordinary shares, priced at an opening price of N3.39 per unit on Monday.

Group Managing Director of Flour Mills of Nigeria, Omoboyede Olusanya,who spoke on the acquisition, said “The proposed transaction is aligned with our vision not only to be an industry leader but a national champion for Nigeria. We believe that this will create an opportunity to combine the unique talents of two robust businesses.

“As a result, we will have a better-rounded and more comprehensive skill set available to us as a combined diversified food business, thus enabling us to better serve our consumers, customers and other stakeholders, whilst providing employees with access to broader opportunities.”

FMN Plc’s market leadership in the flour milling industry, is wide and diversified product portfolio, extensive distribution channels, and strong brands in the Nigerian fast-moving consumer goods (FMCG) sector as well as significant investment in backward integration programmes.

The planned merger is reflective of the trend that has been going on in the flour milling business in Nigeria in the last 10 years. The fierce competition among the flour miller’s has put weaker firms at the mercy of  big 5, hence the  merger  may lead to monopoly in the nation’s food industry.

The inclement business environment in the country  has not helped the flour milling subsector of the nation’s manufacturing sector.

Competition in the flour milling technically began about a decade ago when most players, in a bid to gain more market share commenced stiff competition on the level of expansion in their production capacity . Their overarching  intention  then was to increase their product offerings by increasing their capacity to produce more and in effect gain more market share.

Scant  attention was paid to growing the consumer based to accommodate the expansion and having invested so much billions of naira in capacity expansion, they are now being faced with capacity utilization challenges which are adversely affecting their corporate performance. 

The manufacturing subsector has a few number of players that can  actually be categorised based on their capacity installation. According to research findings , the  leading three operators have a combined installed capacity of 18,600mt per day and are responsible for about 70 per cent of the market share while other operators control about 30 per cent  of the market share. Based on the industry’s high fixed cost of operation, profitability is mainly dependent on the company’s capability to increase volumes.

Currently, there are nine active flour milling companies in Nigeria.About 80 per cent  of the market share is controlled by five (big5) of the nine  firms and as such, there is a lot of discrepancy between the ‘big players’, the ‘mid-size firms’ and the smaller flour milling companies.

 According to Agusto & Co,  the five  major players by market share are: Flour Mills of Nigeria Plc,  Crown Flour Mills Ltd,  Honeywell Flour Mills Plc,  Dangote Flour Mills Plc ( sold to Olam), and (5) Standard Flour Mills Ltd.  The remaining are:  BUA Flour Mills Ltd.  Life Flour Mills Ltd, Valumbra Flour Mills Ltd. and Pure Flour Mills Ltd.

Sampled Companies   Production Capacity Flour Mills of Nigeria Plc(38),Dangote Flour Mills Plc(18)-sold to Olam, Honeywell Flour Mills Plc (14),Standard Flour Mills Ltd (7) and Crown Flour Mills Ltd (8) . The combined capacity utilisation is 85, with Flour Mills of Nigeria and  Honeywell Flour Mills accounting for 52 per cent.

According to the findings of Research Base Portal , based on the strong grip of the total market by the ‘big 5’, there are ‘imperceptible entry barriers’ for potential and ambitious flour millers. Intense competition exists across the various levels of the market. There is however a wide gap between the top level category and the other companies in the industry .

 According to Research Base Portal , the stiff competition in the industry actually reduced the number of players to nine from the initial 17 players. Flour Mills of Nigeria acquired six and merged them into Flour Mills of Nigeria while Crown Flour Mills Ltd also acquired two bringing the number of active players in the market to nine.

There is a trend towards monopoly. The prevailing competitive pricing strategy that threatens the performance and survival of most players in the flour milling industry in Nigeria. A monopoly is a dominant position of an industry or a sector by one company, to the point of excluding all other viable competitors. Therefore, the planned merger between Flour Mills of Nigeria Plc  and Honeywell Flour Mills Plc is a recipe for monopoly . A company that dominates a business sector or industry can use that position to its advantage at the expense of its customers and this not good for the Nigerian food industry.

 Meamwhile , Ecobank Nigeria Limited has advised Flour Mills of Nigeria Plc against the proposed acquisition of equity stake in Honeywell Flour Mills Plc.

The bank alleged that Honeywell Group Limited, the parent firm, had not been servicing its loans with the bank, according to Punch.

In a letter addressed to the Managing Director of Flour Mills of Nigeria and signed by solicitors to Ecobank, Kunle Ogunba and Associates, the company, as well as the public and corporate bodies were warned of the “danger inherent in dealing in any shares of the company.”