Diversified food business Real Good Food (RGD:AIM) rebounds 31.25% to 42p on news of the £34 million plus sale of struggling sugar distribution arm Napier Brown. The disposal looks a sweet deal for the small cap, improving earnings quality and transforming the balance sheet at a stroke.

Investors are still licking their wounds following Real Good Food's profit warning earlier this month (1 Apr), the reasons for which we outlined here and the statement where the board indicated disposal talks were afoot. Today, they are cheering the proposed sale of Napier Brown to cooperative Tereos, the world's fifth biggest sugar group.

Web chart - RGD - Late Apr 15

Napier Brown is Europe's largest non-refining sugar distributor, sourcing sugar from the UK and importing it from overseas, then supplying UK retail, industrial, wholesale and food service customers. But the business has been adversely affected by the slump in EU sugar prices.

In today's statement, Real Good Food highlights Napier's 'long and successful history as a major supplier in the UK sugar market, both to industrial and to retail customers.' Yet it explains 'the decision by the EU Commission to end beet production quotas in the EU from 2017 will have fundamental implications for the industry. The directors believe that in the post-quotas era, Napier Brown's interests would be best served by having a direct integration with a sugar producer.'

A sale to sugar beet, sugar cane and cereals processor Tereos would thereby ensure Napier has access to 'high quality, cost effective and reliable sources of sugar.' If approved by shareholders at next month's Extraordinary General Meeting (14 May), the transaction will move Real Good Food from net debt - £36.3 million as at 30 September – to a net cash position in one fell swoop.

Moreover, it will leave the AIM counter free to focus on its Renshaw, Haydens and Rainbow Dust businesses. These serve the attractive markets of cake decoration, food ingredients and premium bakery and boast a more stable earnings growth profile.

Issue Date: 29 Apr 2015