Disappointment with the performance of Tnuva Food Industries Ltd. is interfering with Chinese company Bright Food's plans for financing its acquisition of the Israeli company. Tnuva has not lived up to expectations, and its value has plummeted, one year after Bright Food, owned by the Chinese government, purchased a 77% controlling interest in Israel's largest food company.
Bright Food holds its Tnuva shares through Bright Food Singapore, a whollyowned private subsidiary. In order to pay for the Tnuva deal, and as part of the privatization reform in Chinese government companies, the parent company planned to put Bright Food Singapore into Bright Dairy, another of its subsidiaries listed on the Shanghai Stock Exchange. In June 2015, Bright Food announced a plan to raise NIS 5.4 billion through an offer of shares. The offering was scheduled for March 1, 2016.
On February 4, a month before the scheduled issue, the Morgan Stanley investment bank published an analysis of the expected offering for its clients, in which it estimated the value of the Tnuva group at only NIS 5.37 billion, which would make Bright Singapore's 77% stake worth NIS 4.13 billion, 37.6% less than its NIS 8.6 billion value in the Tnuva deal.
In other words, Morgan Stanley stated that Tnuva had lost NIS 3.2 billion in value. Bright Food paid NIS 6.62 billion for its Tnuva stake, meaning that according to Morgan Stanely, Bright Food has lost NIS 2.5 billion on its investment.
On February 29, one day before the planned offering, without giving a reason, Bright Food announced that the offering had been called off.
Tnuva hurting Bright Food
The downturn in Tnuva's performance was already clear before the deal was completed. Tnuva finished 2014 with a 5% decline in sales, which totaled NIS 6.79 billion. Its operating profit was down 17.5% to only NIS 530 million, and its operating profit margin dropped from 9% to 7.8%. Tnuva's net profit sank 21.2% to NIS 410 million.
These figures did not escape the attention of Morgan Stanley, which wrote in its document, "Tnuva's net profit fell 56% in 2013 and 20% in 2014. Tnuva's gross profit was negatively impacted by lower food prices during the local election campaign in the first half of 2015. We see uncertainty in the merger of activity, based on a lack of clarity in the current business situation and the difficulty in managing a business on the other side of the ocean."
In the same document, Morgan Stanley notes that it was recommending a 26% lower value for the Bright Dairy share for four reasons, two of which involves Tnuva. The first is that the acquisition of Tnuva's business and other dairy assets is liable to encounter pitfalls. The second is a lack of clarity concerning Tnuva's business. Morgan Stanley also notes that Tnuva's profits are unstable, and finishes off by remarking, "It is hard for us to see the synergy for Bright Dairy from the merger in the short term."
What was the Chinese company looking for in the acquisition of Tnuva? Morgan Stanley lists four things that Bright Food expected to gain from the acquisition. The first is diversifying its products, because "Tnuva has a varied basket of products, including cheese, yoghurt, butter, etc." The second was a better supply of whey for the production of infant milk formula (IMF) products, because Tnuva is a known supplier of whey. The third is management of cowsheds, given Tnuva's thorough and advanced know-how. The fourth is Tnuva's overseas development. In the past, Tnuva expanded to Romania, but closed this business after accumulating huge losses in it. The Chinese apparently hoped to create channels for Tnuva in the West.
Published by Globes [online], Israel business news - www.globes-online.com - on March 10, 2016
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