Kerry Group's hopes of a successful bid for Dalgety's food ingredients business have been enhanced after rival bidder Associated British Foods indicated that its intentions extend only as far as Dalgety's flour milling business. ABF said yesterday that it has sought pre-clearance from the Office of Fair Trading to become a "potential purchaser from Dalgety of its Spillers milling business."

Dalgety has made it clear in its sale document that it wants to sell the Spillers' flour milling and Lucas' ingredients business as a single unit, and indeed has gone so far as to give no separate breakdown of the research and development and marketing spend of the two business.

The specific pre-clearance sought by Associated British Foods from the OFT is seen, however, as a clear indication that ABF has no long-term plans to retain the food ingredients business if its bid is successful. This brings the possibility that Kerry could end up buying the entire business from Dalgety or else end up buying the ingredients business from the successful bidder if its own bid is unsuccessful.

Sources close to Kerry emphasised that Dalgety is seeking to buy the flour and ingredients business as a single unit and refused to rule out retaining the flour business if a Kerry bid is successful.

"Kerry is a consumer of a lot of flour and while it might be on their long-term agenda, they would see if there is a strategic reason for holding onto it or selling it on to somebody else. One thing is certain though, Kerry won't pay an ingredients-type multiple for a flour business," the source added.

Kerry has an extensive food ingredients business in North and Central America, continental Europe and has recently taken a toehold in the Far East with a £6.6 million acquisition in Malaysia. The Dalgety ingredients business offers Kerry what some industry sources believe is a once-in-a-lifetime opportunity to get a major share of the ingredients market in the UK, the one major geographical area where it has little presence in this specialist industry.

That prospective bidders for the Dalgety business will have to make formal expressions of interest within the next couple of weeks, but it is likely to be well into the new year, possibly as late as February, before any deal is completed.

While Greencore and IAWS have also been mentioned as possible bidders for the Dalgety business, sources believe that if either of these Irish companies is to make a major acquisition in the UK, then it is more likely that they would target the Paul's Malt business being sold off by Harrisons & Crosfield.

The combined Dalgety ingredients and flour milling businesses had sales of £359 million sterling last year and operating profits of £29.9 million sterling. The ingredients business is understood to have had sales of around £185 million sterling and operating profits of £17 million sterling. The flour business had sales of £175 million sterling and operating profits of around £13 million.

If the Dalgety businesses are sold as a single unit, then it is likely that they will fetch in the order of £400 million. A successful Kerry bid would probably involve a 5 per cent placing that would raise around £50 million, with the balance funded through debt.

In such a situation, analysts believe that it is highly unlikely that Kerry would retain the flour business and would move to off-load it an early opportunity. ABF's statement yesterday makes it clear that it would be a potential buyer in those circumstances.