RCL Food will add Sunshine Bakery to its stable that already includes Sunbake.

RCL Food has concluded an agreement for the acquisition of Sunshine Bakery.

The acquisition will increase bread volumes in the RCL Food Baking network by 28%.

This article will cover;

1) Which bakery does RCL own?

2) Process followed by Competition Commission.

Quick nuggets:

Remgro owns 80.4% of RCL Foods. RCL Foods is a holding company with diversified interests that focuses on three segments: Consumer (Chicken, Grocery, Pies, Beverages and Speciality business units), Sugar & Milling (Sugar, Animal Feed and Millbake business units) and Logistics.

RCL Foods owns many brands including; Selati sugar, Ouma rusks and Rainbow Chickens, Sunbake, Nola mayonnaise, Mageu Number 1.

1) which bakery does RCL Food own?

Within the RCL Food group of companies sit their bakery division which includes another major bread bakery by the name Sunbake. This division also does big numbers.

In FY22, the baking delivered excellent results across all operating units. Revenue of R5.85bn which was a 12.6% increase from FY20 driven by in-home consumption and a more favourable sales mix.

EBITDA increased by 33.8% to R529,9m at a margin of 9.1% vs R396,1m at a margin of 7.6% in FY20.

Sunshine bakery business is a bakery company that operates countrywide with dominant presence in KZN and is owned by Sunshine Holdings.

In 2018, Philafrica Foods acquired joint control of Sunshine Holdings by acquiring 51% of its issued share capital. Philafrica Foods and Sunshine Bakery Investment have joint control over Sunshine Holdings.

Philafrica is an investment company involved in food processing that owns and operates maize mills, wheat mills, refining plants, oil seeding. Philafrica is controlled by AFGRI Group which is ultimately controlled by Fairfax Financial Holdings, a Canadian investment company.

Sunbake is owned by RCL Foods and is a bakery business. Sunbake can be found in stores across Gauteng, Limpopo, Mpumalanga, North West, and parts of KZN and the Free State.

Since the acquisition will increase bread volumes in the RCL Food Baking network by 28%, someone asked;

1) how Competition Commission does its assessment, and

2) if we have a recent merger prohibited by the Commission?

1) The Commission will investigate the deal to see if it is likely to in any way (vertically or horizontally) substantially lessens or prevent competition in the market.

From a public interest perspective, the Commission will assess the impact of the transaction on employment, particular industry or sector, the ability of SMMEs controlled by HDPs to compete, the ability of national industries to compete in international markets.

If any such concerns arise, the Commission can either prohibit or approve conditionally (behavioural or structural conditions to remedy the concerns). A thorough market assessment is undertaken to determine the effect of the transaction in the relevant market….or effect on public interest.

2) Cashbuild had proposed to acquire 100% of the issued share capital of The Building Company (TBC) for R1,074,700,000.

In May 2021, the Commission recommended that the proposed transaction be prohibited.

The Building Company (TBC) is the building material division of Pepkor, with over 180 stores and sites throughout Southern Africa. Some of their well known brands are; Timbercity and BUCO Western Cape.

Why was Cashbuild interested in TBC? TBC would've enabled Cashbuild to expand geographically and incremental access to additional segments of the market.

Cashbuild Group operates branded stores as well as P&L Hardware- branded stores. The Cashbuild Group operates 318 stores in Africa (256 Cashbuild stores, 61 P&L Hardware stores, and 1 DIY store). In South Africa, the Cashbuild Group has 228 stores.

The Commission considered the activities of the merging parties and found that the proposed merger raises a horizontal as well as a vertical overlap. The horizontal overlap arises in relation to the market for the retailing of building materials, hardware and related products.

The vertical overlap arises in that The Building Company Group, through MacNeil and Cachet, is active in the wholesale supply of building material and hardware products to retailers including Cashbuild.

The Commission found that the proposed merger will result in the creation of the single largest retailer of building material, hardware and related products in South Africa. The market is highly concentrated with only four retailers that have a national footprint.

Cashbuild (acquiring firm), is the largest corporate retailer by number of stores at the national level. TBC (target firm) , is the 2nd largest corporate retailer by number of stores at the national level (including BUCO stores and other specialist/single specialty stores).

At a local level, the Commission found that the merging parties’ stores overlap in over 80 townships. In some of the affected townships, the merging parties compete mainly with independent retailers who do not exert a significant competitive constraint on the merging parties.

The proposed merger was likely to strengthen the buyer/bargaining power of the merged entity. Competitors who made submissions to the Commission complained about the buyer power that the merged entity will achieve as a direct result of the proposed merger.

Merging parties can use their buyer power to exclude their rivals from competing or growing in the townships or rural areas. Dept of Trade Industry&Competition stated that the proposed merger will result in the largest single retailer of building hardware in the country.

The approval of the transaction by the Competition authorities (a material outstanding suspensive condition) has resulted in both parties agreeing to terminate the transaction.

A lot goes into getting a deal over the line.

RCL Food expects the transaction to acquire Sunshine Bakery to close by no later than 30 November 2022 as the transaction is subject to the fulfilment of both regulatory and commercial suspensive conditions.