Tate & Lyle, a FTSE 250 company, has for years been on a path of constant reinvention and renewal. On Monday 26th April, investors were kept sweet following the most recent announcement regarding the 162-year-old firm potentially selling a controlling stake in its sweeteners and starches division. Despite this branch generating 60% of the company’s profit, following the news on Monday 26th, shares jumped 6%.
The strong support for this breakup is largely linked with Tate & Lyle’s underperforming shares. Germany’s Symrise and Ireland’s Kerry are two key competitors within the speciality ingredient industry. Kerry’s pride in driving “world-class innovation” and Symrise’s sustainability campaigns, attracting a more diverse range of customers, have been contributing factors in their shares trading 60% higher than Tate & Lyle’s. As a result, there is no space for complacency in Tate & Lyle’s path of constant renewal.
Economic theory notes many motivations for why companies may choose to split up or demerge. The key motivation, however, tends to be linked to the aim of creating a more focused business. Tighter focus, enables average costs to be cut, thereby improving profit margins and shareholder returns. In the case of Tate & Lyle, the primary production business that makes sweeteners for fizzy drinks and industrial starch has been dragging down the company’s valuation, which currently stands at £3.8bn. This is perhaps prompted by dwindling demand for products such as corn syrup sweeteners in the US. However, other risks such as diseconomies of scale, where profits fall due to firms becoming too large and inefficient, could also have prompted discussions regarding this sale. Thirdly, splitting generates revenue that could be returned to shareholders. This could be a significant reason for Tate & Lyle’s share price bounce last Monday; nonetheless, the future of Tate & Lyle is looking optimistic.
The Financial Times, however, highlights how “the split would not be straightforward”. Factors such as the two businesses sharing manufacturing plants, likely mean that Tate & Lyle will want to maintain some control. However, with rising obesity rates and the Coronavirus pandemic reinforcing the dangers of poor health; there is a growing market for healthy alternatives and a desire to attract more socially conscious investors