IT HAS been three long years that Tiger Brands probably wishes never came to pass. After spending R1.6bn on purchasing a two-thirds stake in Dangote Flour Mills, and then having to make write-downs of nearly R1bn, the South African giant now has its tail between its legs.
On Monday, the company announced that it would cut funding to its struggling Nigerian venture. CEO Peter Matlare is leaving after taking "full responsibility" for the write-downs.
While the statement announcing his resignation earlier this year did not allude to what can now be called a fiasco, there was no mistaking that his position had become untenable. Write-downs coming so quickly after an acquisition are rare and often point to grave errors of judgment.
The first is that Tiger Brands and its advisers appear to have taken an overly positive view of the Dangote Flour Mills business and the Nigerian market’s ability to generate the cash flows it needed to pay back the investment.
This view proved false as the operations were dogged by problems and competition increased in that market. The latter development notwithstanding, Tiger Brands should have known and done better. There are several reasons this outcome could realistically have been avoided.
The first is that the transaction was not hostile, so presumably Tiger Brands performed due diligence. It appears that its people were not as perceptive as they should have been in assessing the real potential of the operation.
Had an accurate assessment been made, the valuation would almost certainly have been lower, as Tiger Brands would have factored in the cost of improvements to bring the operation up to a standard that would enable it to generate further shareholder value.
Alternatively, the information gleaned would have convinced its board that notwithstanding the long-term benefit of being in the Nigerian market, the venture was more trouble than it was worth. Such decisions are taken all the time, as they demonstrate the level of discipline successful companies need in making acquisitions.
Another possibility is that the books and story Tiger Brands were sold by Dangote Flour Mills were not entirely accurate. No one is alleging that this is what happened, so the point is moot.
There should, however, be questions about the role the company’s audit and risk committee did or did not play in the fiasco. While it is appropriate for Mr Matlare to take responsibility as CEO, the monumental error cannot be his alone.
Such large transactions are not pursued without the approval of the board, which has to play devil’s advocate to ensure that all the difficult strategic and financial questions are satisfactorily answered.
This clearly did not happen, so it cannot be business as usual for nonexecutive directors either.
There is no indication whether Tiger Brands will now exit Nigeria altogether or dilute its stake to raise the capital needed to revive the investment. Whatever the final decision, Tiger Brands’ shareholders have taken a hit and in future, they should be more vigilant.
The narrative of an African market that is rising rapidly should not fool company executives into believing that due diligence exercises are unnecessary. This is regardless of whether the opportunity is an acquisition or a normal entry into virgin territory.
There is no doubt that Nigeria offers many opportunities and as a base for expanding into the rest of the west African region. It is trying to diversify its economy to reduce dependence on oil revenues. That means more South African companies will try to enter that market.
Those who were thinking of rushing in should consider themselves warned. The lesson is obvious — tread carefully.
Hopefully, there will be no need for more heads to roll at the altar of that expansion.
Peter Matlare, CEO of Tiger Brands. Picture: MARTIN RHODES
IT HAS been three long years that Tiger Brands probably wishes never came to pass. After spending R1.6bn on purchasing a two-thirds stake in Dangote Flour Mills, and then having to make write-downs of nearly R1bn, the South African giant now has its tail between its legs.
On Monday, the company announced that it would cut funding to its struggling Nigerian venture. CEO Peter Matlare is leaving after taking "full responsibility" for the write-downs.
While the statement announcing his resignation earlier this year did not allude to what can now be called a fiasco, there was no mistaking that his position had become untenable. Write-downs coming so quickly after an acquisition are rare and often point to grave errors of judgment.
The first is that Tiger Brands and its advisers appear to have taken an overly positive view of the Dangote Flour Mills business and the Nigerian market’s ability to generate the cash flows it needed to pay back the investment.
This view proved false as the operations were dogged by problems and competition increased in that market. The latter development notwithstanding, Tiger Brands should have known and done better. There are several reasons this outcome could realistically have been avoided.
The first is that the transaction was not hostile, so presumably Tiger Brands performed due diligence. It appears that its people were not as perceptive as they should have been in assessing the real potential of the operation.
Had an accurate assessment been made, the valuation would almost certainly have been lower, as Tiger Brands would have factored in the cost of improvements to bring the operation up to a standard that would enable it to generate further shareholder value.
Alternatively, the information gleaned would have convinced its board that notwithstanding the long-term benefit of being in the Nigerian market, the venture was more trouble than it was worth. Such decisions are taken all the time, as they demonstrate the level of discipline successful companies need in making acquisitions.
Another possibility is that the books and story Tiger Brands were sold by Dangote Flour Mills were not entirely accurate. No one is alleging that this is what happened, so the point is moot.
There should, however, be questions about the role the company’s audit and risk committee did or did not play in the fiasco. While it is appropriate for Mr Matlare to take responsibility as CEO, the monumental error cannot be his alone.
Such large transactions are not pursued without the approval of the board, which has to play devil’s advocate to ensure that all the difficult strategic and financial questions are satisfactorily answered.
This clearly did not happen, so it cannot be business as usual for nonexecutive directors either.
There is no indication whether Tiger Brands will now exit Nigeria altogether or dilute its stake to raise the capital needed to revive the investment. Whatever the final decision, Tiger Brands’ shareholders have taken a hit and in future, they should be more vigilant.
The narrative of an African market that is rising rapidly should not fool company executives into believing that due diligence exercises are unnecessary. This is regardless of whether the opportunity is an acquisition or a normal entry into virgin territory.
There is no doubt that Nigeria offers many opportunities and as a base for expanding into the rest of the west African region. It is trying to diversify its economy to reduce dependence on oil revenues. That means more South African companies will try to enter that market.
Those who were thinking of rushing in should consider themselves warned. The lesson is obvious — tread carefully.
Hopefully, there will be no need for more heads to roll at the altar of that expansion.
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