OBINNA EZUGWU

At 78, well past retirement age, founder and Chairman of Honeywell Group, Oba Otudeko, having been stripped of his chairmanship of the board of First Bank, his alleged financial lifeline to which Honeywell is heavily indebted by the Central Bank of Nigeria (CBN), will certainly feel the need to save his head from further headaches.

And with a debt balance of N78.5 billion, including a N10.4 billion loan from First Bank, N2.3 billion from Bank of Industry, N6.2 billion from Fidelity Bank, and N3.5 billion from Polaris Bank; and only a cash balance of N27.3 billion, Honeywell Flour Mills Plc (HFMP), whose holding company, Honeywell Group he chairs could prove to one big source of headache.

It did not, therefore, come as a surprise when on Monday last week, it emerged that Flour Mills of Nigeria (FMN) acquired HFMP in an N80 billion deal described by the latter in a statement as an agreement with Honeywell Group Limited (HGL), owners of Honeywell Flour Mills for the sell of 71.69% stake in Honeywell Flour Mills to Flourmills of Nigeria.

“For the proposed combination of FMN through its affiliates and Honeywell Flour Mills Plc (“HFMP”), a portfolio company of HGL. At a total enterprise value of NGN80 billion, HGL will dispose of a 71.69% stake in HFMP to FMN,” the statement had said.

“The proposed transaction will combine two businesses with shared goals and create a more resilient national champion in the Nigerian foods industry, ensuring long-term job creation and preservation.”

Enterprise Value included the debt of the company, which currently has a market value of N31.404bn.

FMN had said the transaction will create a stronger company in the food industry. According to it, “The country and its food security agenda will benefit from both companies’ focus on developing Nigeria’s industrial capability, its agricultural value chain and specifically backward integration of the food industry.”

Honeywell Group Limited’s Managing Director, Obafemi Otudeko had stated that the decision was in line with the company’s vision of creating value that transcends generations.

“Today’s announcement is in line with the evolution of Honeywell Group and our vision of creating value that transcends generations. For over two decades, we have supported Honeywell Flour Mills to build a strong business with a production capacity of 835,000 metric tonnes of food per annum,” he said.

“Following the transaction, Honeywell Group will be strongly positioned to consolidate and expand its investment activities, including as a partner of choice for investors in key growth sectors.”

On his part, Omoboyede Olusanya, Group Managing Director of FMN noted that, “The proposed transaction is aligned with our vision not only to be an industry leader but a national champion for Nigeria. We believe that this will create an opportunity to combine the unique talents of two robust businesses.

“As a result, we will have a better-rounded and more comprehensive skill set available to us as a combined diversified food business, thus enabling us to better serve our consumers, customers and other stakeholders, whilst providing employees with access to broader opportunities.”

But beyond the niceties and expression of optimism by the two companies, the deal has raised eyebrows, even as HFMP’s protracted court case with Ecobank over alleged N5.5 billion debt has come in the way.

FMN and HFMP have been rivals, and the acquisition has led to some concerns about whether it could build up to a monopoly. But beyond the concern about monopoly, analysts who shared their views in various interactions with this newspaper wondered what could have prompted FMN, which is also debt-laden with about N142.8 billion in debt and N52.6 billion in cash, to acquire HFMP. As today, both companies have combined debt burden of N220 billion.

Honeywell
Honeywell building

Olusanya had told an analyst call last week that the acquisition would be done with FMN’s own cash and some debt and aims to apply for regulatory approval.

HFMP has also been making losses in its Pasta business, even as its noodles business has not been able to complete with Indofood’s Indomie Noodles. Overall, HFMP businesses, compared to those of FMN, are relatively small. For many observers, therefore, the deal ordinarily doesn’t seem make for sound business decision on the part of FMN. But for Otudeko and HFMP, it’s debt headache saved.

However, some players in the industry have suggested that the deal may have been sanctioned by the CBN, to which both companies are indebted.

Regardless, for some others, the decision by FMN to make the acquisition could not have been made without due consideration.

“We shouldn’t claim to be wiser than those who are taking the decision. They have a growing company. They know what is good for them. They know what synergy the acquisition will bring on board, and how to exploit it,” said Dr. Boniface Chizea, CEO of BIC Consultancy Services.

“They know what capacity Honeywell Flour Mill has and what it will bring on board. You and I don’t operate in the flour mill industry. Again they have shareholders. This is strictly a business decision. It is not as if Honeywell is indebted to FMN, in which case it would have been a hostile takeover. So it is strictly arms length business decision. They have done their calculations and they think that it is viable. That’s why I said in my presentation that it must be a mutually-beneficial transaction.”

Dr. Chizea has argued in presentation that the focus should be on the sustainability of operations to preserve shareholders value, maintain and possibly grow employment opportunities and continue to contribute to the growth prospects of the Nigerian economy.

“This therefore,” argued “Is not the time to worry about the evolution of monopolistic situations or any such related considerations.

“As has been reported Nigerian Flour Mills currently sources about 25% of its raw materials locally with a view to attaining a laudable 40% by year 2024 thereby rising robustly to the reality of the situation of the Nigerian economy going forward and no doubt this development should brighten the prospects for the attainment of this objective following the concentration of resources….”

“Not surprising investors reaction to this development is bullish as the share value of Honeywell Flour Mills immediately appreciated at the Market rising from a value of N 3.72 per share by 9.73% while the share price of Flour Mills on the other hand remained so far neutral to this development. Analysts also believe that this is a deal which Nigerian Flour Mills could close without resort to short term borrowing leveraging on its robust cash in hand situation of approximately 52.7 billion Naira as at the end of first quarter of this year…”

Indeed, investors had reacted positively to the news of the acquisition. Soon after it was announced, HFMP rallied at the start of the trading session, trading N3.72, up 9.73% on Monday, and by Tuesday the company’s shares had gained 9.78 percent, a development Chizea said was sign that the deal was welcomed by investors.

“As soon as they took that decision, the share price of Honeywell jumped,” he said. “It was only the one of Flour Mill hasn’t reacted very positively for now.”

But the initial jump in shares was soon reversed on Wednesday, following an advice by Ecobank Nigeria to FMN against the proposed acquisition, in a letter to FMN MD alleging that Honeywell had not been servicing its loans with it.

Both Ecobank and Honeywell have a long-standing legal battle dating back since 2015 over an ‘unpaid’ debt of N5.5 billion by the latter. While Ecobank is insisting that Honeywell is indebted to it to the tune of N5.5billion, out of which N3.5 billion had been paid, Honeywell claimed to have paid the debt in full.

Ecobank in the letter signed by solicitors to it Kunle Ogunba and Associates, had said the FMN as well as the public and corporate bodies were warned of the “danger inherent in dealing in any shares of the company.”

The bank claimed that it had advanced several loan facilities to Honeywell Flour Mills, including working capital disbursements. It further stated that as a result of the failure of the company to liquidate its loan facilities, it was constrained to commence winding up proceedings against Honeywell Group Limited at the Federal High Court, Lagos in suit no: FHC/L/CP/1571/2015.

The letter said, “However, while the said action was dismissed at the Federal High Court and the Court of Appeal, it is pertinent to state that an appeal with appeal no: SC/700/2019 has been filed challenging the said decision at the Supreme Court (Notice of Appeal is herein enclosed and marked as Annexure C).

“Hence, the effect of the above is that there is currently a winding-up action/proceeding pending against the said Honeywell Group Limited.”

The bank quoted a provision of Section 577 of the Companies and Allied Matters Act 2020 as saying, “Where a company is being wound up by the court, any attachment, sequestration, distress or execution put in force against the estate or effects of the company after the commencement of the winding-up is void…”

According to the bank, this restricts Honeywell Group from moving ahead with the sale of Honeywell Flour Mills to Flour Mills of Nigeria.

“Consequently, we hereby demand that Flour Mills of Nigeria Plc, in its best corporate interest, immediately cease and desist from consummating the subject transaction, which aims to divest the assets of a company being wound up (Honeywell Group Limited).

“Please be further informed that the assets of both Honeywell Group Limited and Honeywell Flour Mills Plc. are the subject of the winding-up action and thus based on the doctrine of “lis-pendens” (in addition to the provisions of CAMA supplied above) you are advised to refrain from dealing with the subject asset which forms part of the subject matter of litigation,” the bank added.

The letter prompted investors of Honeywell to initiate massive sell-offs of the company’s shares on Wednesday, reversing Today’s gains by 9.78%.

On the day, shares of Honeywell dropped from N4.09 as at the start of trading session to N3.69 by the close of business. Market capitalization also shed about N3.17 billion.

However, that proved to be only a momentary setback. Honeywell in response, debunked the claims made by Ecobank, stating that there is no winding up petition against the company in any court in Nigeria.

In a press release titled: “RE: PURCHASE OF HONEYWELL GROUP LIMITED’S 71.69% STAKE IN HONEYWELL FLOUR MILLS PLC,” signed by its Secretary, Yewande Giwa, and filed with the Nigerian Exchange Limited (NGX), the company assured its stakeholders that the recent transaction was made in compliance with all rules and regulations.

“It is pertinent to set the record straight that there is no Winding up Petition currently pending or live against HFMP in any court in Nigeria. There is also no pending Court Order restraining trading in the shares of HFMP or inhibiting HFMP or its owners from dealing in its assets. HFMP assures its investors, regulators and stakeholders that in all of its engagements with FMN, it received independent legal advice and asserts that the transaction is not in breach of any subsisting Order of Court, The issue as to whether HFMP is indebted to Ecobank is still before the Courts and the final decision remains the exclusive preserve of the Courts. It is also important to state that the Court of Appeal judgement being referred to in the reports did not declare HFMP to be indebted to Ecobank,” the company said.

It added that, “The assertion lack merit, were written in bad faith and are a deliberate attempt to undermine a transaction that will result in substantial benefit to the Nigerian economy and entrench the collaboration of two publicly quoted companies. As a responsible corporate citizen, we have entered the transaction with FMN having taken all legal issues into consideration.’’

Subsequently on FMN, assured its stakeholders that the acquisition did not breach any subsisting court order, maintaining that its agreement with HFMP did not breach any subsisting court order.

In a press release issued by the company, signed by its secretary, Umolu Joseph, it noted that: “Flour Mills of Nigeria Plc (FMN) wans to assure its stakeholders that the recent announcement by the Group to assume majority stakeholder status of Honeywell Flour Mills Plc (HFMP) on Monday 22nd of November, 2021, was made after carrying out necessary due diligence and obtaining appropriate legal guidance.

‘’Consequently, FMN confirms that this agreement is not in breach of any subsisting Order of Court in matters relating to any third party.’’

The swift response to Ecobank restored investor confidence. Honeywell which had on Wednesday seen its share price drop by 9.78 per cent to N3.69, with a N3.17bn loss in market capitalisation, by end of trading on Thursday, had seen investors trade a total of 52.47 million shares, driving its share price up by 9.76 per cent to N4.05. Its market capitalisation gained N2.85 billion to close at N32.12 billion, from N9.52 billion on January 4, 2021.

On its part, Flour Mills’ market cap increased to N123.01 billion on Thursday from N106.61 billion on the first trading day of the year, even as its share price rose by 15.39 per cent to N30 per share on Thursday from N26 per share.

Some of Thursday’s gains by Honeywell, however, reversed on Friday, as the company’s share price closed the week at N3.96, down from Thursday’s N4.05, while market cap came slightly down to N31.4 billion.

It may yet be interesting few days in the market for the company, as more legal fireworks may prompt more back and forth by investors.

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