Kraft takes a bite
The war in Iraq threatens to chase foreign investors away from the region, but the Egyptian food industry has proved to be attractive enough to weather the times. Yasser Sobhi finds out
While many American companies were feeling uncomfortable because of the war in Iraq, American giant Kraft Foods, the second largest branded food and beverage company worldwide, has been reinforcing its presence in the Egyptian market. On 8 April it acquired 100 per cent of Family Nutrition, a leading producer of biscuits and snack cakes in Egypt. The transaction, which was conducted in the Cairo Stock Exchange, was worth LE446.27 million at LE535.61 per share.
"Egypt is a growth market for us. We're looking at a long-term investment in Egypt and the prospects for the economy are very good," Phil Pratt, director of Kraft in Egypt, told Al- Ahram Weekly. With regard to the timing, "we have been considering the deal for several months; it's only by coincidence that it has come at this time [during the war]".
Kraft already has a foothold on the local market through its co-manufacturing activities in other domestic plants, and is involved with the producers of products such as "Tang" beverages and "Toblerone" chocolates. The company will continue to manufacture these products as well as some of its international commodities including Kraft cheese, Maxwell House coffee, Nabisco cookies and crackers, Philadelphia cream cheese, Oscar Mayer meats, Post cereals and Milka chocolates.
Family Nutrition is a privately owned family business with a labour force of more than 1,800 and whose turnover in 2002 totalled approximately $40 million.
"The company is very strong in the local market; it is the number one producer of biscuits and mayonnaise products and the second most important manufacturer of cakes. Our objective is to understand the new business then to improve it, expand and export to the countries in the region," says Pratt.
But how will the company cope with the impending boycott of American products in protest at US policy in the region? "We don't think politics. It could affect our business like any other business. We have no control over the situation, but we think it will be resolved on the long run," said Pratt.
The food and beverage industry is attracting not only American investors but also European and other investors. The stock exchange announced last week that it received a tender from Edita to buy 100 per cent of International Food Company (IFC) shares at a cost of almost LE30 million within two weeks.
Edita, a Greek company represented in Egypt within the framework of a joint venture with the local "Berzi" group and other investors, wants to strengthen its market position by acquiring IFC, the exclusive producer and distributor of Hostess goods in Egypt. Hostess is an American producer of well-known brand names such DingDongs, Twinkies and Cup Cakes. IFC has a network of 1,680 wholesale clients and 4,300 retail clients throughout Egypt.
"The food industry is very lucrative and rewarding. Developed markets have reached saturation point, so foreign companies are looking for growth opportunities in emerging markets and they can't ignore the Egyptian market," says Hussein Choucri, president of HC securities group, responsible for the Edita bid. The interest in the market, he says, is logical. Egypt's 70 million inhabitants tend to be big consumers. Unlike other sectors, the food industry is not reliant on a large amount of imports since most raw materials can be obtained on the domestic market, and they are both competitively priced and high in quality.
"Assets in Egypt have become very attractive since the currency was devalued by 67 per cent over the course of two years. Investors are now acquiring assets at discount prices, even excluding profit growth," says Choucri.
Indeed, the Cairo and Alexandria stock exchange monthly reports show that since 2000, a total of 47 acquisition deals have been concluded, 12 of which were in the food industry. The other transactions were mainly in the banking and cement sectors. Buyers in the food industry tend to acquire 100 per cent or almost 100 per cent stakes in companies.
"Foreign investors would like to take control, increase their market share and consolidate their budgets and the accounting of all their companies. Acquiring less shares does not reach this target," says Choucri, "but it doesn't mean that it poses any threat. On the contrary, it benefits the Egyptian economy because it provides employment, uses Egyptian inputs and exports from Egypt. If the foreign investor leaves, he can't take the plant with him."
But some Egyptian businessmen, who held on to shares in their company, prefer to encourage international companies to become majority shareholders. Mounir Abdel-Nour, president of the French food company Vitrac, is one such businessman. After establishing a successful company in the early eighties with family and friends, he sold 60 per cent of the company shares to the Swiss company Hero, while he himself retained a 40 per cent stake and the position of chairman.
"Our internal capacity in terms of management, technology, know-how and marketing are limited. We realised that to continue to grow and to enter new markets we needed new expertise," said Abdel-Nour. He explained that since the new foreign partner arrived, a real improvement has taken place in management, quality of production and diversification of the company's products. This will soon translate into increased exports.
Indeed, the devaluation of the Egyptian pound which followed the floatation of the currency last January has also increased exports, promoting Egypt's attractiveness to foreign companies targeting European and Middle Eastern markets. But experts say this will happen only if structural reforms continue to take place.
