ABF sparks £500m bid battle for African sugar producer

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Associated British Foods has stoked a £500m bidding war for Africa's biggest sugar company, Illovo Sugar.

The company behind Silver Spoon sugar is looking to buy 51 per cent of Illovo Sugar and is understood to have made an offer last week. The South African-listed Illovo revealed to the Johannesburg stock exchange yesterday that it was the focus of two takeover offers, the other from the French group Tereos.

Illovo has operations in South Africa, Malawi and Swaziland, among others. It is regarded as a well-run business that could be a good asset when the European sugar market is fully opened to competition in 2009.

AB Foods hopes that by acquiring Illovo it will gain raw materials that it can refine and sell in Europe, while insisting that the company should remain a largely African concern. It wants to buy a little more than half the equity, but would retain the stock market listing in South Africa.

Advisers to AB Foods hope that Illovo investors will prefer its straight cash offer to the more complex deal put forward by its French rival. Tereos wants to acquire a majority stake in Illovo through a swap that would see Tereos assets in Brazil and Mozambique injected into the company for new shares.

AB Foods, a FTSE 100 business with a market value of £6.8bn, already has interests in 41 countries.

It said in a statement yesterday that it is in talks "about a potential transaction" but that "there is no certainty that these discussions will lead to an offer".

Illovo is valued at about £500m. AB Foods is likely to have offered a premium to tempt investors, with a 51 per cent stake likely to cost it at least £300m.

The European Union is poised to open up the sugar market to competition from overseas. Subsidies will end and developing countries will have full access to the market by 2009, making sugar production within Europe unlikely to turn any profit.

In response, European productions have been looking to developing countries to source raw sugar which could then be refined in Europe. British Sugar, AB Foods' sugar subsidiary, has operations in the UK, China and Poland.

AB Foods' finance director John Bason said: "The thing that British Sugar would be able to bring to Illovo is value and expertise on agriculture, production efficiencies and marketing. The second thing we could do is provide a route to market in the EU. Otherwise, the EU is a very big place."

Charlie Mills, an analyst at Credit Suisse, said: "Strategically it makes sense. This is all about securing raw material supply in the new European sugar regime."

Illovo shares have doubled in the last year on mounting speculation that a takeover offer from a European refiner would emerge. If the AB Foods deal goes ahead, it will be the company's biggest food deal since it bought Burns Philp - the US spices business - in 2004.