Life looks sweeter for RGF as it offloads sugar business

Real Good Food group's name is a nightmare for lovers of the English language. As a sugar merchant and maker of cake coverings, it is a nightmare for dentists. And until last week, the Aim-quoted company was a nightmare for investors. 

But now it has agreed to sell Napier Brown, its sugar distribution business, to Tereos, Europe's second largest sugar producer, for £34m. That is about £10m more than the group's market value and enough to wipe out its debt and allow RGF to focus on chocolate icing. 

It marks the end to a far-from-sweet decade since RGF bought Napier Brown, the UK's biggest independent sugar distributor and purveyor of Whitworths demerara, for £68m. 

Pieter Totte, RGF's Dutch chairman, says the plan was always to take advantage of changing regulation of Europe's heavily protected sugar market. But it was a big gamble for a small company operating in a global market over which it has no control. And it didn't pay off.

Instead, the group's profits have been corroded by a five-year fall in sugar prices and a dispute with British Sugar, part of Associated British Foods and the UK's sole producer of beet sugar, from which RGF buys much of its supplies. 

Napier Brown made operating losses of close to £2m, tipping the whole group into a pre-tax loss of £1.5m in the year to March 2014. In the half year to September, pre-tax losses had widened to £5.2m and the shares fell 40 per cent last year. 

Last week, the company said the imminent end to EU quotas on sugar beet production mean that Napier Brown's "best interests would be served" by being "fully integrated with a sugar producer". 

That sounds less like strategy than necessity. 

But it was right to look for an exit. The end to the EU's sugar regime means that as of 2017, European sugar producers will be able make as much sweet stuff as they like and export wherever they reckon they can make a turn. Pundits reckon that EU producers are gearing up to lift production by at least a fifth. 

Less palatably, though, once quotas are abolished, Europe's historically high sugar price will fall. And the only way to protect margins will be to improve yields, become more efficient, streamline routes to market and squeeze out the competition. 

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At the same time, the sugar trade remains one of the most protected in the world, shaped by national politics and entrenched interests, particularly in Europe and the US, stretching back to the 18th and 19th centuries.

France began growing beet sugar during the Napoleonic war when British blockaded access to its plantations of cane in the Caribbean. It is now the world's eighth largest producer and Tereos is its biggest sugar company. 

Against this backdrop, RGF's total business wouldn't sweeten a cup of tea. It supplies perhaps a third of the sugar sold in bags in British supermarkets. Its share of the much bigger market in industrial sweeteners, which is dominated by British Sugar and Tate & Lyle, is much less. 

But Mr Totte says he was banking on three things. First, the UK - in contrast to France - grows less sugar beet than it consumes; second, it is close to Europe's biggest sugar producing states; and third, as Mr Totte says in loaded tones, "sugar is heavy".

That, and the high tariffs on most imports, ensures that Europe's markets will retain their localised and national flavour. Regional producers like Tereos may expand into neighbouring territories but shipping sugar - cane or beet - across oceans is a mug's game, say traders, particularly when prices are falling. 

Still, Mr Totte was lucky that Tereos, unlike many of its rivals in Europe, is in an expansionist mood and keen to secure a foothold in the UK market. The French group, says one analyst, "is spoiling for a fight and Napier Brown is a small company in the right place at the right time". 

So now RGF has the wherewithal to feed up its other businesses making marzipan and icings and baking custard tarts for Marks and Spencer and Waitrose. Mr Totte has turned a nightmare into a dream. Should he be so lucky again.

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