Spain’s biggest food company Ebro Puleva, which recently acquired US rice maker Riviana, could be taken over this year because of its strong balance sheet and growth prospects, analysts have told Ivan Castano reports from Madrid.

The €380m (US$488m) Riviana deal has turned the company into a global rice champion and this, coupled with its strong operating ratios and cash flow prospects, make it an attractive acquisition target for a foreign rival or a leveraged buyout firm.

The rice business is very attractive and “Ebro can reap growth opportunities in value-added products such as part-boiled and pre-cooked rices,” says Javier Mata, an analyst with Banesto Broker in Madrid.

Ebro’s per-dividend profits surpass 3% and the company can easily increase them or hand out an extraordinary dividend, Deutsche Bank says in a recent research report. Ebro is “trading at very attractive ratios and it has great profit potential after the Riviana acquisition,” it adds.

David Pena, analyst with broker Caja Madrid says that Ebro’s debt management capabilities are encouraging. The firm will finish 2005 owing €462m from €287m in 2004 but it shelled out €380m to buy Riviana, so the debt will be low in consideration of that transaction, Pena points out.

Ebro lacks big reference investors and 45% of its shares float freely on the Spanish Stock Exchange, a scenario that is likely to woo more interest, Pena adds. Spain’s Hernandez family is Ebro’s biggest individual investor, with a 12% stake.

The sugar could get in the way

But Ebro does have a problem, Mata points out. Its sugar franchise is expected to suffer from new European regulations curbing sugar production and prices, he says, reducing the value of one of the company’s main profit pillars.

“Ebro’s sugar margins are 23% of Ebitda compared to 14% for others such as Unilever or Danone,” Mata says. “They are not sustainable in the long run.”

While the sugar unit’s woes could spook some investors, others may see a benefit in buying Ebro to sell its three businesses separately –sugar, rice and dairy products –or keep parts of them to create a more profitable enterprise, analysts say.

Ebro may be plotting a divestment itself. Responding to market speculation that the company is considering selling its underperforming Lactimilk business to rival Clesa, Mata says that that deal is a possibility.

“Lactimilk consumes a lot of resources and generates little value,” he says. “Puleva wants to grow in functional and enriched milks while Clesa wants to achieve volume.”

Lactimilk aside, Ebro has a large dairy business producing a variety of functional milks and yoghurts under its well-known Omega 3 brand.

The unit, which is struggling under restructuring efforts, delivered sales of €368m as of September 2004, down 1% from the previous year. Still, Caja Madrid’s Pena says the company can generate over €110m in cash flow annually, and should reach €328m by the end of 2005. The company has also announced it will pay €51m worth of dividends this year, up 10% from 2004, and representing a 42% payout. That percentage surpasses the one paid by Spanish industry and the companies composing the Ibex-35 main share index.

“For a company of this size this is very significant,” Pena says. Ebro’s capital investments are largely amortised and its production capacity and efficient global logistics also make it a promising investment target, he adds.

Bidders want the rice

But who would make a sweep for Ebro? Multinationals keen to expand in the global  rice market are the likeliest bidders for Ebro, which is billed as Europe’s biggest rice maker, analysts say. But the uncertain future of Ebro’s sugar business complicates valuations, adds Mata, who believes that Ebro’s more valuable rice and dairy units could each fetch a significant purchasing premium.

Ebro has a €1.7bn market capitalisation. While the company is not necessarily the sector’s most profitable, its 11.3 P/E and 5.9 EBITDA-enterprise ratios stand below the 13 and 6.4 respective industry averages.

Ebro is forecasting that revenues will rise 16% this year to €2.3bn after consolidating Riviana. EBITDA should jump 14% to €300m while EBIT should increase 17% to €210m.

Mata’s predictions are lower with sales reaching €2.1bn and EBITDA €228.9m. Net profits should increase 12.5% to €144.5m.

Pena has a €12.03 euro, 12-month share-price target for Ebro while Deutsche Bank forecasts its stock could rise 7.6% to €11.3 in the near term.