LAGOS, NIGERIA — Nigeria’s leading food and agro-allied company, Flour Mills of Nigeria (FMN), is set to tighten its grip on the country’s flour milling market as it prepares to acquire a majority stake in Honeywell Flour Mills PLC (HFM), an affiliate of the Honeywell Group Ltd.

FMN, which announced on Nov. 22 that it had signed an agreement to acquire a 71.69% share in its milling rival at an estimated cost of NGN80 billion (US$193.7 million), operates 17 modern manufacturing facilities in 12 states with production capabilities across grain milling, edible oil and sugar refining, agro inputs, and animal nutrition and protein segments.

In addition, FMN, which in the last financial year issued NGN30 billion (US$72.6 million) in corporate notes with tenors of five and seven years at 5.5% and 6.25%, respectively, also has announced entering into an agreement with First Bank of Nigeria Ltd. to acquire the Bank’s 5.06% equity in HFMP.

“Consequently, upon completion of the acquisition, and subject to obtaining all requisite regulatory approvals, FMN is set to hold a circa 76.75% equity interest in HFMP,” FMN said when the acquisition announcement was made.

“The proposed transaction will combine two businesses with shared goals and create a more resilient national champion in the Nigerian foods industry, ensuring long-term job creation and preservation,” FMN added. “A combination of FMN and HFMP will bring together two trusted and iconic brands, creating a food business that is better positioned to benefit the growing Nigerian population and leverage opportunities stemming from the African Continental Free Trade Area.”

The final equity price per share payable will be determined based on HFMP’s adjusted net debt and net working capital at the date of completion, the statement said.

Omoboyede Olusanya, group managing director at FMN, said, “The proposed transaction is part of our global growth strategy, which is aligned with our vision to not only be an industry leader, but also a national champion for Nigeria in the Food and Agro-allied industries.”

However, FMN’s proposed stake acquisition is subject to approval from the appropriate regulators such as the Securities and Exchange Commission of Nigeria.

There are concerns from some quarters that combining the FMN and HFM milling businesses would reduce competition in Nigeria’s flour milling sector, although even as early as 2016, market analyst KPMG said the country’s flour milling was dominated by three flour millers that control more than 70% of the market, hence “reflecting an oligopolistic market structure.”

With the combination of FMN and HFMP flour milling enterprises, FMN will remain one of the largest and most diverse food and agro-allied groups in Africa.

Currently, FMN has an installed flour milling capacity of approximately 9,310 tonnes per day (wheat equivalent) at Apapa milling sites in Lagos State.

In a 2015 analysis of Nigeria’s flour milling industry, KPMG predicted the sector would continue to be dominated by the big companies that controlled most of the market.

“From a deals and investment perspective, the sector is expected to remain vibrant, as industry players implement various strategies aimed at maintaining competitiveness amidst declining margins,” KPMG predicted.

The top milling companies — FMN, Olam, Dangote, Charghoury and Honeywell — have been controlling 32%, 24%, 19%, 11% and 10% of the market share, respectively, while all other small millers combined had 4%. The three largest players in Nigeria’s flour milling market account for approximately 75% of total revenues, according to KPMG.

The market analyst said while other flour milling companies in Nigeria “operated at an average capacity utilization of 50% or less, FMN’s capacity utilization is estimated at about 70%, enabling the company to maintain market dominance across the different regions of the country.”

Elsewhere, Nigerian lender Ecobank Nigeria has raised concerns that the planned acquisition could jeopardize an application the bank has filed in the High Court seeking winding up of HFM on grounds of outstanding debts the miller owes.

Both FMN and HFM could not comment on the progress and emerging concerns on the transaction, but Honeywell Group’s Tomi Otudeko said in an email response to World Grain: “We are still in the middle of the transaction.”

He referred all queries on the transaction to FMN “given the post-completion corporate structure.” FMN did not respond to World Grain’s questions and request for interview.

Honeywell’s record revenue

Separately, HFM said despite FMN becoming its majority shareholder, the company’s “listing will be retained for the foreseeable future and minority shareholders of HFM will be treated fairly and in line with capital market regulation.”

Honeywell Group, with an annual production capacity of 835,000 tonnes of food, reported an all-time high revenue of N109.5 billion (US$265 million), an increase of 36% more than the N80.4 billion (US$194.7 million) posted in the financial year, according to the company’s annual report released in May 2021.

The company recorded 39% growth in operating profit to N7.6 billion (US$18.4 million), up from the N5.4 billion (US$13 million) reported in FY 2020, an achievement the food company attributed to “improved efficiencies and cost optimization strategies.”

Honeywell said the new complementary transaction “combines FMN’s market-leading offerings that include grain-based foods, sugar, starches, oils, spreads and breakfast cereals with HFMP’s market leading diverse and differentiated range of carbohydrate products.”

“Stakeholders would benefit from the more than 85-year combined track record of FMN and HFMP and their shared goal of making affordable and nutritious food available to Nigeria’s population,” Honeywell said.

As for flour and flour-based foods customers in Nigeria, the company expects the combination of the two milling entities to “benefit from access to a wider product range and a robust pan-Nigerian distribution network, accessing greater number of points of sale supported by enhanced customer-focused sales teams and redistribution capabilities.”

 “Following the transaction, Honeywell Group will be strongly positioned to consolidate and expand its investment activities, including as a partner of choice for investors in key growth sectors,” said Obafemi Otudeko, managing director, Honeywell Group.

Perpetual grain shortages

Although both HGL and FMN are confident their transaction will enable Nigeria to achieve its food security agenda based on the two millers’ focus on developing the country’s “industrial capability, its agricultural value chain and specifically backward integration of the food industry,” they must contend with perpetual grain shortages, particularly regarding wheat, most of which must be imported. In fact, a report from the US Department of Agriculture (USDA) in 2021 said the supply of grains in Nigeria is expected to substantially decline due to the raging military conflict in key producing states in the northeastern part of the country and also the impact of the COVID-19 pandemic.

The Boko Haram insurgency in northeastern Nigeria has led to the displacement of thousands of people and disrupted agricultural production.

Humanitarian agencies say lootings, kidnappings, and fear of attacks “have prevented many farmers from working in their fields, leading to the loss of harvests and productive assets, and extremely reduced purchasing power.”

The USDA, for example, projects corn production in Nigeria to decrease by 4% to 11.1 million tonnes in 2021-22 from the 11.5 million tonnes realized in the previous year, largely because of “the negative effect of insecurity in corn growing areas.”

Even the area earmarked for corn production is expected to shrink by 8%, to 6 million hectares in 2021-22, down from 6.5 million hectares the previous year due to the rising insecurity in producing states.

A slump in production also is expected this year in wheat with projections indicating a mere 55,000 tonnes would be harvested during the 2021-22 marketing year. Wheat area in Nigeria also is expected to decline by 5,000 hectares to 55,000 hectares during this same period.

“Banditry and kidnapping activities have reached high levels in Northwest Nigeria, which is the primary wheat cultivation region,” the USDA said. “Wheat is grown mostly in Borno, Bauchi, Yobe, Kano, Jigawa, and Zamfara States.”

Due to the ongoing intense military operations in these states to expel terrorists and bandits, there are now tight security restrictions that “make it highly difficult for farmers to access their farms,” the USDA said.

With Nigeria’s wheat consumption expected to increase by at least 10% during the 2021-22 marketing year to 4.9 million tonnes, flour milling companies would have to look to global major producers such as Russia, the United States, Australia, Canada and Black Sea countries for imports, according to USDA’s analysis.

The Central Bank of Nigeria’s policy on accessing foreign exchange has been compounded by the grain supply constraints.

Many of the flour milling companies in Nigeria “have started looking for partners such as subsidiaries or parent companies outside of Nigeria for help in getting dollars,” the USDA said. “The situation is negatively impacting the price of wheat products like bread and other wheat derivatives with prices increasing 10% to 15% due to high costs of production by millers and bakers.”

Due to the increasing prices of wheat products and dependence on imports to meet domestic demand, the government, which is keen in reducing wheat imports by 50%, has introduced measures designed to reduce the dependence on wheat flour.

For instance, Nigeria requires flour millers to include between 10% and 20% of cassava flour in the production of bread despite numerous challenges in implementing the policy such as the “change in quality and taste of baked goods, increased costs associated with infusion of enzymes in the bread-making process to ensure consistent bread quality, and limited availability of high-quality cassava,” according to a report by KPMG.

The high cost of bread has resulted in “loaves staying longer on retail shelves and consumers are not purchasing the same amounts as before,” the USDA noted.

In what is likely to impact the Nigerian flour milling business in the long term, the USDA said consumers are moving toward available alternatives such yams, plantain, sweet potatoes, and cassava products.

Meanwhile, flour millers in Nigeria have opted for strategies aimed at reducing the price of wheat flour while ensuring profitability, including “shifting to buying cheaper wheat from Latvia and Lithuania.”

In some instances, “flour millers are blending cheaper, low-quality wheat with more expensive high-quality hard red winter from the United States,” according to the USDA analysis.

Despite FMN, which recently successfully issued a N70 billion corporate bond program to replace the company’s high-cost short-term funding, acquiring a majority share in HFMP, the country’s flour milling market structure is likely to remain largely unchanged even as the two companies have exuded confidence the new transaction will “serve as a catalyst for an even stronger stream of innovation that is focused on local content offerings.”