Major Irish food groups likely for Dalgety bid

Kerry Group, Greencore and IAWS are all seen as possible bidders for parts of the Lucas food ingredients and Spillers flour milling operations of the troubled British foods group Dalgety. Both have been put up for sale as part of a major restructuring operation of the British group.

If Kerry succeeds in a bid for the Lucas bakery ingredients, flavourings and coatings business, it would be likely to cost it upwards of £240 million and probably require Kerry to raise funds from the market. The Spillers flour milling business being sold by Dalgety is less profitable, but analysts believe that any buyer would need to pay around £150 million.

Dalgety spokesman Mr Steve Crowther said: "We would prefer to sell the food ingredients business as a single unit, but we are aware that there is a natural split between flour milling and the rest of the ingredients business."

He added that since first indicating that the business might be put up for sale a month ago, Dalgety has received a number of approaches but has not had any discussions yet with any prospective purchasers. The British investment bank Lazard Brothers has been appointed to handle the disposals of the ingredients business.

Kerry chief executive Mr Denis Brosnan has already said that the group has indicated its interest in the Lucas business, but Greencore declined to say whether it is interested in bidding for the flour milling business. IAWS is seen as another possible bidder for the flour business.

The main rival that all the Irish companies may have in any bid for the Dalgety business is Mr Garry Weston's Associated British Foods, whose cash pile was boosted even further by £630 million earlier this year when it sold its Quinnsworth/Crazy Prices Irish supermarket business to Tesco. ABF is thought to have well over £1 billion to spend and could absorb all the Dalgety businesses being sold without any difficulty.

Dalgety has not broken down turnover and operating profits between the Lucas and Spillers businesses. But combined the businesses had sales of £359 million sterling last year and operating profits of £29.9 million sterling - broadly the same as the previous year.

Analysts in London believe, however, that the bakery ingredients business, in which Kerry would be interested , had sales of £184 million last year and profits of £16 million to £17 million. A realistic multiple of 14 to 15 times operating profits suggests that a buyer will have to pay around £250 million sterling.

Given Kerry's current balance sheet, analysts believe that the Irish group would have to hold a rights issue to fund all or part of the cost of such an acquisition. Such a rights issue would probably involve Kerry Co-op not taking up its rights in respect of its 39 per cent stake in the plc, with institutional investors providing the bulk of the funds. Some analysts believe that Kerry could even use a successful bid for the Dalgety business to mount a major fundraising that would allow it fund the acquisition as well as reduce its existing debt of £349 million.

The UK is one notable gap in Kerry's international food ingredients business. Dalgety's bakery ingredients, flavourings and coatings business would be a strategic product and geographic fit with the existing business, which is based in North America and continental Europe.

Dalgety's flour milling business is thought to have produced sales of £175 million sterling last year and operating profits of £12 million to £13 million. This business would attract a lower multiple that the bakery ingredients, but analysts believe that a buyer would still need to pay around £150 million sterling.

Bidding for Dalgety and possibly Harrison & Crosfeld's malting business could present Greencore with a dilemma, as the Irish group will have to decide whether it wants to increase its stake in the American sugar company Imperial Holly, after it was diluted down to 16 per cent as part of Imperial's takeover of Savannah Foods.

Analysts believe that Greencore could handle a £150 million acquisition of Dalgety's flour milling business and around £100 million for the Harrison & Crosfeld malting business. "Greencore couldn't do both of those and also increase its stake in Imperial Holly," said one Dublin analyst.

He added that investors in Ireland and the UK would probably prefer to see Greencore bid for the Dalgety and Harrison & Crosfeld businesses, rather than spend much the same amount of money taking control of Imperial Holly, at a time when the American sugar industry may be heading of a cyclical downturn.

Analysts believe that the smaller IAWS might decide to bid for either the Dalgety or Harrison & Crosfeld businesses, but not both.