Associated British Foods, owner of British Sugar, is in talks to buy Spanish rival Azucarera Ebro in a deal that could be worth £500m.

The UK's second-biggest sugar producer was approached by advisers for the Spanish parent company Ebro Puleva after European sugar refiners attempted to consolidate in the aftermath of the EU's sugar subsidy shake-up in 2006.

In June, Spanish shareholders agreed that Azucarera, which makes £64m profit on total sales of £526m, should be spun off by the Continental food giant so that it could pay down its debt and concentrate on selling its main rice and pasta products.

ABF, controlled by the wealthy Weston family, who also own Selfridges and Fortnum & Mason, has a market value of £6.2bn.

In July, the consumer goods giant, which also owns discount retailer Primark, Twinings Tea, Patak sauces and Kingsmill Bread, said group sales had risen by 24% in the past 16 weeks and that its sugar business had increased by 21% in the quarter. However, it warned that profits were expected to fall this year because of the reform in the EU's sugar regime.

ABF, which has always been conservative in managing its balance sheet, is hugely under-leveraged with only £358m of net debt.

For many years European sugar beet growers and processors made vast profits because the EU would buy surplus stocks at a prearranged price as well as subsidise exports of several tons of sugar produced each year.

The regime fell foul of the World Trade Organisation's rules and subsidies were rescinded, causing a huge fall in profits at both ABF and market leader Tate & Lyle.

British Sugar, like its European rivals, has been on the acquisition trail to counter the EU changes.

The company bought a beet producer in Poland and China as well as a majority stake in Illovo, a leading sugar producer based in Durban, which has interests in several other African countries.

Illovo will eventually start selling in the UK.

The strategy to diversify away from British beet production will be furthered by the acquisition of Azucarera .

It is understood that Germany's Nordzucker, which recently bought the Danish firm Danisco, and Sudzucker are also interested in a Spanish acquisition.

Source: Financial Mail