Ebro Foods' failure to win over SunRice shareholders in its pursuit of the Australian rice firm will be a blow to the Spanish company but, Dean Best writes, more M&A targets are likely to be in the pipeline. 

In March, the chief of Spanish rice-to-pasta maker Ebro Foods was talking up the company's planned acquisition of Australia's Ricegrowers Ltd.

Antonio Hernandez Callejas told analysts at the Consumer Analyst Group Europe (CAGE) conference in London that Ebro's plan to buy Ricegrowers - alongside its planned purchase of SOS Corporacion Alimentaria's rice unit - would be a "new step forward" for his business.

In particular, Callejas referred to Ricegrowers, which trades as SunRice, as a "very powerful business that is very complimentary to us". Callejas was careful to note that Ebro's A$600m offer was still subject to the support of SunRice's shareholders but his comments indicated the belief Ebro had that its targets would benefit the business.

Just days later, Ebro secured the acquisition of SOS's rice assets and then looked ahead to the end of May when the SunRice shareholder vote on its takeover offer was due to take place.

However, Ebro's pursuit of SunRice, which was revealed in the autumn, had been anything but smooth. Ebro and SunRice said in October that the two companies were in exclusive talks over a possible deal. A month later, a deal had been struck, subject to the approval of SunRice shareholders, who were scheduled to vote on it in March.

However, the vote was pushed back as SunRice's board awaited a report from Lonergan Edwards into the valuation of the business. There was concern among some shareholders and growers that Ebro's bid had under-valued SunRice.

In the meantime, Ebro improved its offer for SunRice. In mid-February, Ebro said that, as part of the bid, it would buy all the medium-grain rice grown in Australia at the benchmark price for Californian rice for seven years - up from a previous pledge of five years.

With the Lonergan report still in the pipeline, the shareholder vote was pushed back to May. The Lonergan report was published in late April and concluded that Ebro's offer was "fair and reasonable". The report also carried the unanimous backing of the SunRice board for the Ebro bid.

However, the concerns that the Ebro offer had not sufficiently valued SunRice had refused to disappear and, last month, a second report - commissioned by the Australian firm's largest shareholder - claimed the Spanish company's bid was not high enough. The report angered the SunRice board. Chairman Gerry Lawson called the research behind the study "biased and misleading".

Nevertheless, last week, SunRice shareholders voted - and Ebro failed to win the support of enough investors for the deal to go through. Callejas admitted that what he termed the "operation" was "complex from the start". The support of a special majority - set at 75% - of SunRice's Class A and Class B shareholders needed to pass the deal was, Callejas, acknowledged "a difficult target to meet". The vote showed that, while 76% of SunRice's Class B investors backed the offer, only 67% of Class A shareholders had supported it.

In response, the Ebro boss did not rule out returning to the table with SunRice but stated that the company was "in an outstanding position" to look elsewhere for expansion via acquisitions.

"We will maintain the excellent relationship we have enjoyed so far with SunRice and perhaps in the future, if it changes its complex corporate structure, we will be able to find new possibilities for collaboration," Callejas said in the wake of the vote.

"We will continue seeking other alternatives to set up business in the area. The operation was complex from the start because the special majority was a difficult target to meet but the financial strength of Ebro puts it in an outstanding position to reach similar targets, in rice or in pasta."

For its part, the SunRice board said the level of support the offer did receive "strongly" endorsed its decision to put the bid to the company's investors. Lawson said SunRice would look to "maximise value" for shareholders and growers, tackle the company's "high debt" and "enable the company to continue to grow".

Andy Smith, an analyst who covers Ebro at MF Global, said the failure to land SunRice was "somewhat disappointing" for the Spanish company but said the public comments from Callejas indicated that it was unlikely to make another bid for the rice firm. Ebro, Smith said, is set to look at fresh targets.

"The failure to secure SunRice is somewhat disappointing for the Ebro management team as the CEO and chairman seemed pretty certain when I met him at CAGE that the deal was going to get done," Smith tells just-food. "His public commentary suggests he will not go back and bid a higher price so I assume Ebro will move on and look for further deals in their core areas of European and Americas rice and pasta. The group's balance sheet is still extremely strong and I'd expect an equal focus in both product areas in terms of future M&A."

Ebro is focused on rice and pasta so those two sectors are likely to be key to the company's acquisition strategy. However, Ebro could look at other categories. As well as buying SOS's rice assets, Ebro also took a 10% stake in the business, which now focuses on olive oil.

At the CAGE conference, Callejas said the investment in the maker of Bertolli and Carbonell olive oils would allow Ebro to "look and see" how that sector develops.

Furthermore, Callejas said Ebro was also looking to grow organically its presence in categories adjacent to rice and pasta like pasta sauces. Ebro, he added, was also looking to branch out into areas like ready meals and frozen foods.

Rice and pasta are and will be core to Ebro's future expansion and the failure to secure SunRice will be a blow to the company. There are, however, almost certain to be more moves in the M&A arena from Ebro - and they might not just focus on rice or pasta makers.