KENYAFlour miller Unga Group is set to spend Sh542 million on acquisition of a 52 per cent stake in a bakery that is owned by Kenya’s sole inflight caterer NAS Holdings.

The transaction values the takeover target at Sh1 billion in a deal that will see the Nairobi Securities Exchange-listed firm re-enter the baking business after its sale of Elliots Bakeries in the 1990s.

The miller says the transaction will help to diversify its business which currently mainly comprises milling maize and wheat grains.

“The company recently reviewed its long-term strategy and made the decision to … become a significant player in the wider food industry —specifically to be a provider of nutritious food,” the firm says in a circular to shareholders dated November 5.

Unga’s decision to use cash in the acquisition of Ennsvalley Bakery marks a reversal of the miller’s previous intention to close the deal through a share swap where it was to issue 25 million units of its own stock.

Unga will further lend Sh163 million to the bakery, raising its total investment to Sh705 million.

NAS, which will have a 48 per cent interest in Ennsvalley after the deal is concluded, has also committed to lend undisclosed sums to the baker to fund its expansion.

Both firms will price their loans –with a five-year maturity— at an interest rate of 15 per cent.

Unga announced plans to sell a small portion of its stake in Ennsvalley following the acquisition, indicating that its interest in the baker could later fall below 52 per cent.

The miller said it will make the acquisition through its subsidiary Unga Holdings, which it owns 65 per cent, with the remaining 35 per cent held by America’s Seaboard Corporation.

This means that Unga’s effective interest in Ennsvalley will be 33.8 per cent and could drop below this level if a strategic investor later buys into the baker as intended.

Unga will fund the acquisition from internally generated funds and the Sh335 million it recently received from sale of its 51 per cent stake in paper packaging firm Bullpak.

The disclosures show that Ennsvalley has consistently posted profits amid a steady increase in revenues.

The baker made a net profit of Sh25.3 million in the year ended March, rising 10 per cent from Sh23 million the year before. This came as sales increased 19 per cent to Sh737.8 million.

It made its biggest net profit of Sh39.1 million in 2010 when it enjoyed higher margins that saw it post the larger earnings despite relatively lower sales of Sh376.9 million.

Unga says the baker has become a major player in the high quality breakfast segment with its branded range of bread, cakes, doughnuts, cupcakes and cookies.

Ennsvalley is also in partnership with Nakumatt Holdings, a deal which has seen it manage a growing number of in-store bakeries at the retailer’s branches.

The sale of freshly baked products at supermarkets has grown in popularity with other retailers including Naivas, Uchumi and Tuskys also having on-site bakeries.

Besides such retailers, Ennsvalley faces competition from established firms like Mini Bakeries, Kenblest and Elliots.

Unga posted a 40 per cent jump in net profit for the year ended June, helped a 12 per cent increase in sales to Sh17 billion. Its share price has more than doubled in the past year to trade at Sh40.

November 13, 2014; http://www.businessdailyafrica.com/Corporate-News/-/539550/2520394/-/uvl3i2z/-/index.html