RAINBOW Chicken will buy a 49% stake in Zam Chick from Zambian agri-player Zambeef for $14.25m, the company said on Monday.
Rainbow — South Africa’s largest processor and marketer of chicken — said the deal with Zambeef, which also has operations in Ghana and Nigeria, would allow the companies to work together in order to take the poultry industry in Zambia to a "new level".
Rising commodity prices, inflation and surging chicken imports from Brazil have put pressure on local poultry players such as Rainbow, forcing them to consider other avenues and markets for growth.
Avior Research equity analyst Jiten Bechoo said the deal was a good move for Rainbow.
"It allows diversification away from the adverse poultry dynamics in South Africa to perhaps better prospects in Africa," Mr Bechoo said.
"It’s a very small acquisition — my estimate of the after-tax earnings contribution is in the order of R16m. But there are better prospects for growth given the fact that Zambeef is looking at regional exports more aggressively," he said.
Zambeef will continue to manage the day-to-day operations of Zam Chick while Rainbow will provide technical assistance, Rainbow said.
The transaction is subject to approval from the Competition and Consumer Protection Commission of Zambia, as well as the South African Reserve Bank.
In November, Rainbow said it aimed to raise as much as R3.9bn in a rights offer to fund its acquisition of Foodcorp, which is South Africa’s third-largest food producer.
The proceeds from the rights offer will be used to fund the Foodcorp takeover, as well as other strategic growth opportunities. The Zam Chick purchase will be partly funded from a portion of the proceeds from the rights offer, Rainbow said on Monday.
The company offered 276,964,802 new shares, allowing shareholders to buy 80 shares for every 100 they own at an issued price of R14.20 on December 6.
However, Rainbow’s shares were down 4.81% at 3.25pm on Monday.
"This is more related to the fact that they released a disappointing trading statement last week," the equity analyst said.
"The earnings decline was a little bit more than what people though it would been in light of the fact that Rainbow, among most of the producers locally, has more defensive, higher-margin value added products in its overall sales mix — that should have been more of a shield in this down cycle," he said.
Last Thursday, Rainbow warned that earnings per share and headline earnings per share for the six month period ended December 31, 2012 are expected to fall 65%-85% from a year earlier.