Nigerian Capital Market – Lessons from Dangote and Dangote Flour Mills Plc

Nigerian Capital Market – Lessons from Dangote and Dangote Flour Mills Plc

What will you call a man that sold a loss making business for $200 million, bought it back for $1 and sold it again for $362 million? I call him Dangote! Join me to take lessons from his business prowess. 

Lesson 1: the art of negotiating

In 2012, Dangote sold 65% of Dangote Flour Mills Plc (DFM) to Tiger Branded Consumer Goods Plc (TBCG) for $200 million.

In 2013, TBCG increased their stake to 70% to become the owners of the company and soon changed the company’s name from Dangote Flourmills to Tiger Branded Nigeria Ltd.

Dangote didn’t lose any sleep selling the company because it was a loss making business (the company made a loss of N2.8 billion in 2012).

TBCG didn’t have a problem buying it because they were sure they could turn it around considering their status as South Africa’s largest consumer goods producer.

Sadly, the company reported a loss of N12.6 billion in 2015 from N6.1 billion loss in 2014, and N7.9 billion loss in 2013.

On 11 December 2015, Tiger Brands and Dangote Industries Limited reached an agreement with respect to the sale of Tiger Brands’ shareholding (now 65.7%) in the Company to Dangote Industries Limited.

How much did Dangote pay to buy back DFM?

He paid $1 for 65% stake, same stake he sold of circa $200 million less than 4 years ago.

As part of the deal, Dangote would inject N10 billion into TBCG while Tiger Brands would settle all outstanding debt of about N5 billion.

This is a masterclass in deal making by all standards, when you sell a company for $200 million and come back to buy it for $1, it’s a stuff of legends, it’s no fluke. Did I hear what about the N10 billion? Don’t make a mistake, not a kobo will go to TBCG, it’s an injection of cash into the business, it’s a working capital for the business.

Before you think it was a fluke and not so much to be learnt, listen to Ian Cruickshanks:

“The chips are down now, it’s raining disaster. The sellers saw South Africans with deep pockets coming. We have shown ourselves to be totally naive in negotiating outside our own borders and have been taken for a ride,” Ian Cruickshanks, chief economist at the South African Institute of Race Relations

The punch line: “…totally naïve in negotiating…”

Lesson 2: in business, you must know what you are stepping into, no matter how promising, always do your due diligence.

It’s not sufficient to say it’s Dangote’s Company so it must be good. It’s Nigeria, there is a market so it must be profitable. In business, a deep understand of the business environment is everything.

An understanding of your business environment will reveal where your opportunities are and the possible threats to your business. This understanding will produce realistic plans, forecasts and ensure their effective implementation.

As big as Tiger Brands is, they failed those basics. Listen to what the CEO, Peter Matlare said:

“…substantial new flour capacity had come on stream in Nigeria between 2010 and 2012, when the deal was negotiated”

In perspective, if you make plans for a new market with the assumption that there is a potential to grow local capacity from 700 to 1,000 when in actual fact your competitors had grown it to a possible capacity of 1,600, you are on your own.

Again, they failed in due diligence. For a loss making business, you cannot be hanged for being too careful but they were not even careful enough.

“Someone is responsible here. Was the due diligence done properly and who did it? Were the numbers checked out by auditors and if so, let’s ask the auditors how far their professional insurance cover goes” Cruickshanks said.

Lesson 3: when you realise your mistake, take your lesson, take your loss and move on, else you will lose everything.

You have to respect the bravery and elegance of TCMG in the face of a huge loss. They were brave and swift in taking their loss. They wrote off $120 million dollars and assumed the debt of N5 billion, the CEO stepped down, the company received $1 from Dangote as consideration for 65% stake and moved on.

Tiger Brands chief operating officer Noel Doyle, said at that time that it was a “good outcome” for the group, as it protected the interests of 3,200 people in Nigeria. “It has given us as elegant an exit as is possible in the circumstances.”

Welcome Olam!

Some months back, Olam International made a cash bid of 130-billion naira ($362m) to buy Dangote Flour Mills (DFM) of Nigeria.

Via a scheme of arrangement that became effective on 1st November, 2019, Olam agreed to pay Holders of the shares of DFM N24 each per share for their holdings.

As at close of business yesterday 8th November, 2019, a lot of shareholders had received their payment, it was a good deal for shareholders of Dangote Flours by all standards, and Olam was glad to take on such a huge investment and challenge.

“We are confident about the growth prospects in this country, and this acquisition, doubling our installed capacity here, is evidence of our long-term commitment to the Nigerian economy,” KC Suresh, head of Olam’s grains and animal feed division, said.

On 30th October, 2019 DFM released their 9 months financials, it was another loss story of N6.8 billion. We hope it won’t be a de ja vu.

Whatever the outcome, the lessons from this Dangote Flour business case will remain a masterclass to be studied by foreign investors for a very long time.

We can only wish Olam well.

Final Lesson: billionaires never stop consolidating

On 4th November, 2019, Dangote Sugar Refinery announced a proposed business combination with Savannah Sugar Company Limited (SSCL), a private limited liability company engaged in sugar cane farming and sugar milling.

Dangote moved on from Flour to Sugar the same week he received consideration for his holdings in Flour, your bet is as good as mine, Sugar is sweeter.

All hail King Dangote!

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