Mezzan Holding announced today that it had effectively acquired a 70% stake in KSA-based start-up snack business Al Safi Food Co. (will be later renamed to Mezzan Food Co.) via a SAR90.75mn capital injection (KWD7.3mn, in line with the company’s guidance of KWD7.0-7.7mn), with Al Faisaliah Group retaining the remaining 30%. The transaction grants Mezzan presence in KSA, a key target market, where it only has minimal exports currently, allowing it to produce, market and distribute all of Mezzan’s own brands (Mezzan is the market leader in potato chips in Kuwait), while retaining exclusive rights to Al Safi Foods’ existing product portfolio (mostly baked snacks). Al Safi Foods was established by Al Faisaliah Group in January 2014 and started operations in May 2015. The capital increase will be utilised to meet the target company’s capex needs until end of 2017 including KWD2.5mn to streamline the business (manage operating costs, raw materials and SKU rationalisation) and meet target profitability levels by 4Q17, in addition to fund plans to build new factories and add new product lines in KSA in the coming two years (Al Safi Foods has rights to 70ksqm of land in Kharj that will be utilised for that purpose) to meet demand for KSA and other neighbouring markets.   We are positive on the deal as it is another milestone in Mezzan’s geographic diversification strategy (Kuwait was 66% of revenue in 2015 down from 85% in 2013, aided by expansions in the UAE and Qatar). Initial guidance of 5-10% top-line contribution by 2018e indicates that the KSA operation could be of a decent size in the medium term; however, impact in 2016-17e will likely be small, as the capital increase proceeds are deployed and profitability improves. (Company disclosure, Hatem Alaa, Nada Amin)   Mezzan Holding: KWD1.06 as of 23 August 2016, Rating: Neutral, FV: KWD1.18 per share, MCap: USD1,100mn, MEZZAN KK / MEZZ.KW