Danish sugar and ingredients firm Danisco closes on its xanthan gum production deal in China, consolidating the firm's stabiliser presence in this emerging market. Just days after the firm posted a weaker third quarter as higher raw material prices hit margins and price competition continues for a number of key ingredients.
The Chinese deal cleared this week sees an 80/20 joint venture agreement between Danisco and the Chinese Henan Tianguan group, setting up supplies of the stabilising agent used in sauces, beverages and salad dressings to food manufacturers working in China.
The closure on the deal comes after Danisco announced earlier this month that it will take over the ingredients arm of French chemicals firm Rhodia, leading to further consolidation for the company's position in the xanthan market.
The ingredients division's performance is traditionally weak in the third quarter of Danisco's fiscal year but investment bank Goldman Sachs notes that this year in particular, Danisco's EBITA margin was down,
"While Danisco's long-term target for top-line growth in ingredientsremains 3- 6 per cent (50 per cent above an estimated market growth of 2 per cent -4 per cent), we remain cautious and forecast 3 per cent top-line growth from 2005 to 2011," said the bank. We conservatively assume margins of 14.8 per cent in 2005, as we continue to believe that the company's pricing power remains limited in the majority of Danisco's ingredients portfolio, added the report.
With the €250 million buy-out of Rhodia's ingredients business - the number one supplier of probiotics to supplements, the Danish giant leapfrogs into the number two slot for cultures that includes bioproducts and food protection and reinforces its position in hydrocolloids. Rhodia's unit generated around €211 million in sales in 2003.
"The move fits in well with our goal to strengthen the business platform through acquisitions and organic growth," a spokesperson told FoodNavigator.com last month.
But Goldman Sachs predicts that business could be lost at Danisco through the recent acquisition of Quest by Irish food ingredients firm Kerry - a deal that excludes the flavours activities which remain with UK owner ICI.
"Kerry was traditionally a customer of Danisco and not a competitor. We estimate that Danisco's annual sales to Kerry were in the region of Dkr50-60 million. It is reasonable to expect that the acquisition of Quest, a competitor to Danisco in areas such as texturants, emulsifiers, but also food enzymes and starter culture, might take away some of that business from Danisco," said the bank.
In recent years the market has put pressure on Danisco to hit the acquisition trail in light of imminent reform to the European sugar regime that is slated to slash the bottom line of the company - a leading sugar producer - by as much as 40 per cent. Observers expect to see Danisco consolidating its position in the higher margin ingredients such as flavours, rather than expand capacity in more traditional and low value added segments.