Talks between junior foods business Sovereign Foods and Country Bird are currently focused on the synergies of a merged entity – a sign that the deal could go ahead.

According to South Africa's Business Report, Country Bird, which already has a 10 per cent share in the broiler market, has upped its shares in Sovereign from 13.4 per cent to 22 per cent in the past year and both companies have been issuing cautionary announcements ever since.

Analysts believe Country Bird may want to take over Sovereign following the end of merger talks between Johannesburg Stock Exchange-listed agro-processing group Afgri and Sovereign in July.

Charles Davies, the chairman of Sovereign, said there were two ways of going about the deal. He said: "One is to buy it and asset strip the company and the other is to merge and use the resources available to grow the combined business. We are in favour of the latter."

Sovereign has grown from a small family business in 1948 to a significant contributor to South Africa's poultry industry. The group has various products in its portfolio, including Country Range, Cater Chicken and Farmer's Lane, which it provides to retailers like Shoprite and Spar.

Analysts say a merger between Sovereign and Country Bird would make it the third-largest poultry producer in South Africa after Astral Foods and Rainbow Chicken.

Davies said that the most attractive benefit of a potential transaction between Sovereign and Country Bird was the economies of scale that would result from the formation of a significant third-largest competitor in the poultry and animal feeds market.

"There are also potential synergistic benefits related to more substantial feed milling operations and the geographical diversification possibilities into Africa."

According to Mike Davis, the chief executive of Sovereign, the company already has a sound relationship with Country Bird, which was the provider of grandparent birds to the group.

"This is a good breed of bird that we like which is why we buy from them," he told Business Report.

Peter Wille, an equity analyst at BoE Private Clients, said a merged entity would provide increased bargaining power in price discussions with retailers.

Mr Wille said: "The increased size could also lead to synergies in bulk procurement of raw materials especially when imported, which makes more sense when buying in large quantities."

He added that further potential synergies on the operational front would include one head office, one listing, as well as transport synergies.

Meanwhile, Country Bird is not confining itself to buying Sovereign alone. The group, which is already operating in Namibia, Botswana and Zambia, plans to expand on its African businesses.

Bryan Kent, the chairman of Country Bird, said the firm would look at opportunities in other African countries, including Zimbabwe.

"These developments are consistent with the group's strategic aim of expanding geographically and by product in order to improve the overall quality of earnings," Mr Kent told Business Report.

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