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ABF weighs sale of Chinese sugar business

ABF weighs sale of Chinese sugar business

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Associated British Foods is looking to sell its lossmaking sugar business in China to focus on its sugar operations in Europe and Africa.

The British conglomerate, which owns retail chain Primark, has invited bids for its five cane sugar mills in southern China and two sugar beet factories in the north-east of the country, according to people familiar with the situation.

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The business could fetch up to $1bn, according to analysts’ top estimate. “Anything like $1bn would be a tremendous result for ABF”, said analysts at Société Générale. They estimated that the Chinese sugar business made an operating loss of £10m last year on sales of £240m.

ABF declined to comment.

The group, controlled by the Weston family, has been making big changes to its sugar business, where 90 per cent of profits have dissolved during the past three because of the collapse in world prices.

It made a net loss of £116m on the closure of two “uneconomic” sugar beet factories in northern China last year, but more recently said that cost-cutting had improved performance.

In its half-year figures announced last month, it reported “a much better result for the two remaining beet sugar factories in China”.

Graham Jones, analyst at HSBC, said in a recent note: “ABF’s Chinese sugar business, we believe, is running close to break-even. Local prices have continued to be much firmer than a year ago due to tighter local stocks.”

George Weston, chief executive, said last month that after three years of low global prices, “I think we’ve turned the corner. Sugar prices are moving up.”

Analysts say, however, that price volatility is likely to escalate as a result of deregulation of the EU sugar market next year, which will end production country quotas and minimum guaranteed pricing.

China is the smallest of ABF’s three geographic sugar regions, accounting for 23 per cent of the unit’s sales.

ABF has turned its attention to the African sugar market and last month paid £262m to buy out minority partners in South Africa-based Illovo Sugar. It said Illovo was attractive because of rising demand for sugar in Africa, driven by increasing populations and higher incomes.

ABF is one of the world’s largest sugar manufacturers, with capacity to produce more than 5m tons of sugar and 600m litres of ethanol a year.

The sugar unit still has fairly substantial sales, totalling £1.8bn last year, but is the weakest of the group’s five core businesses. It posted operating profits of £43m and a 2.4 per cent profit margin in its last financial year, ending September 12.

Richard Chamberlain, analyst at RBC Capital Markets, said a sale of the Chinese business would be a positive step.

“Sugar tends to command a fairly low valuation multiple in most people’s sum-of the parts for ABF and Primark has the highest multiple,” he said. “So, from a valuation perspective, this would be a positive but it’s not a huge deal.”

Courtesy : ft.com



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