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PEP expands in Oceania food with $345m Allied Mills purchase

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Oceania's largest private equity group, Pacific Equity Partners, tightened its grip on the region's food industry with the $345m acquisition of top-ranked miller Allied Mills from Cargill and GrainCorp.

Pacific Equity Partners - the buyout group founded in 1998 by three former Bain executives and Paul McCullagh from Salomon Brothers – agreed to pay Aus$455m including debt for the Allied Mills, the region's largest flour miller, four months after closing its last food sector deal.

PEP in September completed the Aus$307m purchase of Australian pie-maker Patties Foods, extending the private equity firm, which also has education and financial services assets, into a food sector in which it already owned Pinnacle Bakery and Manuka Health.

It is a sector in which Sydney-based PEP has built up expertise through previous successful investments, including New Zealand biscuit-maker Griffin's, beverage company Frucor and ice-cream maker Peters, all of which it has sold on.

PEP suffered a high-profile setback in mining in 2015 when it failed in a long-term pursuit of Bradken, the Australian heavy engineering group.

'Flat-to-declining margins'

The purchase will hand GrainCorp - which owns 60% of Allied Mills, with Cargill holding the other 40% - Aus$190m for its shares, above the Aus$177.8m at which the Australian grain handler had valued the stake.

However, the main benefit of the deal appears to be the release of capital from a tie-up which both GrainCorp and Cargill were said to have viewed as non-core, thanks to relatively poor returns.

Allied Mills – which comprises seven flour mills, four mixing plants, four frozen food sites and a starch factory – has been faced with "flat-to-declining" milling margins, according to GrainCorp.

GrainCorp described as "slightly improved" the performance of Allied Mills last year, thanks to a strategy of focusing on higher-value products, although accounts show growth of 21% to Aus$15.5m in the miller's earnings.

According to one source, an issue with the Allied Mills tie-up, which is now 15 years old, is that both GrainCorp and Cargill have 50% voting rights in the venture, despite their different economic interests, a factor which has presented challenges in gaining clear leadership needed for strategic development.

'Financial flexibility'

Alistair Bell, the finance director of GrainCorp, said that "this sale of an equity investment in Allied Mills creates an opportunity to realise value, reduce gearing and improve our returns.

"The funds of Aus$190m will provide flexibility as we approach our peak gearing and remain available for other redeployment opportunities."

Mark Palmquist, the former executive at US-based CHS who has been GrainCorp chief executive for nearly three years, added that the deal would give the Australian grain handler "the capacity and flexibility to take a look at opportunities that may not have been possible before".

GrainCorp shares closed 0.1% higher at Aus$9.51 in Sydney.

By Mike Verdin

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