Foray by US affiliate may affect Greencore

Imperial Holly, the American sugar group in which Greencore has a 27 per cent shareholding, has made a takeover bid which could transform Imperial into the biggest sugar processor in the United States, with almost one-third of the market.

Imperial has mounted an unsolicited $491 million (£330 million) bid for Savannah Foods, which puts it in direct conflict with Savannah management, which is attempting to put through a merger with a privately-owned American group, Flo-Sun Inc.

The view in the market is that, while this is a bid by an associate company, it is also of major strategic importance for Greencore. Analysts believe the structure of the takeover offer would dilute Greencore's stake in Imperial from the current 27 per cent to 16 per cent. However, the Irish company will undoubtedly inject fresh equity into Imperial over a period of time and possibly even move to a majority position in the next two or three years.

Savannah has said it will discuss the bid with Imperial, but it is understood Savannah management believes that, while the Imperial proposal is financially attractive to shareholders, the merger with Flo-Sun makes more sense for business reasons. That merger was proposed six weeks ago, but has received a negative reaction in the market and from some Savannah shareholders who have already taken legal action to prevent the linkup. Under the terms of the merger proposal, Savannah shareholders would have a 41.5 per cent of the combined company but were not given any cash alternative. Dissident shareholders also believe the terms are more advantageous to Flo-Sun, a private Florida-based company owned by the Cuban Fanjul family.

The Imperial offer of $18.75 per share is a 24 per cent premium over Savannah's closing price on Tuesday night. The bid is made up of 70 per cent cash and 30 per cent Imperial shares, while Imperial has also said it would take on Savannah's existing debt of $26 million.

The equity element would mean that Greencore's shareholding in the combined company would fall from 27 per cent to 16 per cent, if the takeover goes ahead. Market sources believe, however, that Greencore would aim to rebuild its stake in Imperial Holly, especially as the combined company would have debt of $370 million. "Another equity injection from Greencore would be a handy way to reduce that debt to manageable proportions," one source said.

Greencore's finance director, Mr Kevin O'Sullivan, would only say that the Irish company, which has two directors on the Imperial board, is "supportive" of the bid. He would make no comment, however, on Greencore injecting more equity into Imperial if the bid for Savannah is successful.

Imperial's chief executive, Mr Jim Kempner, said the two companies compete in different parts of the United States. "By combining, we will have a very balanced representation and geographic spread of production facilities." Mr Kempner also stated that Lehman Brothers was "highly confident" that Imperial could raise the $340 million debt to pay for the acquisition.

Savannah said it would discuss the new offer with Imperial, but industry sources believe that, despite the negative reaction to the Flo-Sun deal, the offer makes more sense as it would give Savannah assured supplies of raw cane sugar.

Savannah is a substantially bigger company than Imperial, with a stock market value of $491 million at the offer price compared to Imperial's stock market value of $307 million. Savannah has sales of $1.1 billion compared to Imperial's $750 million, but the combination of the two companies would have 31 per cent of the American processed sugar market, comfortably ahead of the current market leader, Tate & Lyle. Analysts believe that the combined company would have operating profits of around $100 million.

While Imperial is based in Texas, the Rocky Mountain states and the west coast, Savannah is largely based in the deep south, with cane sugar refineries in Georgia, Louisiana and Florida, as well as beet sugar operations in Michigan.

Some analysts have, however, expressed reservations about the move by Imperial and believe the US sugar industry is heading for a cyclical downturn in 1998 and 1999, with margins and profits set for a squeeze by an increase in refining capacity and an increase in beet sugar volumes.

Interestingly, the biggest shareholder in Savannah is Archer Daniels Midland with 6 per cent. Some years ago, ADM proposed to buy 20 per cent of the state shareholding in Greencore, a proposal that was later abandoned in favour of a placing of the state shares with institutions.