January 21/Business Monitor International Ltd. (BMI) -- Cargill has been cited as a possible bidder for U.K.-based ingredients firm Tate & Lyle. The research note form brokers MF Global suggested that Cargill's spinoff of its fertilizer operations Mosaic could give the firm the financial flexibility to pursue acquisitions and a move for Tate & Lyle would help consolidate the U.S. high-fructose corn syrup market. Tate & Lyle's share price reacted very positively to the report and at one point was up by over 8% (on January 20). BMI recognizes the merits of such a move, with Tate & Lyle currently trading with a low price-to-earnings ratio due to what it views as an uninspiring product pipeline and limited opportunities for future transformational growth.

By reducing its debt commitments, Cargill would be in a stronger position to make acquisitions, particularly given the firm's strong earnings on the back of rising commodity prices. BMI sees Tate & Lyle as a strong fit at an attractive price. However, it would not be an adventurous move, and Cargill may have something more ambitious up its sleeve, with an acquisition that would help broaden its exposure to emerging markets perhaps a more exciting possibility.

Tate & Lyle is generally seen by investors as a boring commodity play, which does well when demand for its key commodities such as sugar and starch is booming but suffers when demand wanes. However, the firm has made moves to alter this perception by focusing on value-added ingredients. As part of this process, it has also been selling off its sugar refining operations, and in July 2010, it agreed to sell a large chunk of its sugar business to American Sugar Refiningn.

BMI has previously suggested that Tate & Lyle was too small to be a major player in the sugar field and that exiting this sector makes strategic sense. A focus on value-added products should make the firm less exposed to swings in commodity prices and position it for stronger long-term growth. However, this strategy is dependent on the company building up a portfolio of value-added products with high commercial appeal and the development of a successful innovation pipeline -- something that it has struggled to achieve in recent years.

Ideally, Tate & Lyle would use the funds from the sale of its sugar operations to develop innovative ingredient products with high commercial appeal. However, this is a hit-and-miss process, and in recent years, it has been more miss than hit, with the firm perhaps lacking sufficient resources to compete with other larger ingredient rivals. A takeover by a larger entity with more resources therefore seems like a plausible scenario, with Cargill fitting the bill thanks to the overlap between the two firms' starch and high-fructose corn syrup operations.  

From the January 24, 2011, Prepared Foods' Daily News
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