April 21, 2017 / 5:16 PM / 9 months ago

UPDATE 1-South Africa's credit rating cuts sink Pioneer Food's mystery deal

* Pioneer CEO says was working with global firm on deal

* S&P, Fitch cut nation’s debt rating to junk

* Rand has weakened, likely to stoke inflation (Adds comments by Pioneer CEO, analyst, futher details)

By Nqobile Dludla and Martinne Geller

JOHANNESBURG/LONDON, April 21 (Reuters) - South Africa’s Pioneer Food Group said on Friday talks on a large potential deal with “a multinational organisation” had collapsed due to the cut in the country’s credit rating to junk status as a result of the deteriorating economic situation.

Pioneer shares fell more than 7 percent on the news before paring losses to close down more than 4 percent at 169 rand.

“Due to the recent sovereign debt rating downgrades in South Africa and the potential for additional downgrades, the parties have decided to discontinue negotiations at this time,” Pioneer said in a stock market filing.

On March 7 Pioneer, which sells Ceres juice and Sasko bread, said it had been approached to explore a “material transaction” that could affect its share price. It did not identify the party involved.

However, Chief Executive Phil Roux said on Friday the deal had been six months in the making and nearing completion when calamity struck.

“The other party that we were involved with is a multinational organisation, a massive global firm ... and then South Africa was faced with the unfortunate predicament of a downgrade to junk status,” Roux told Reuters.

“It’s a terrible predicament because so much work, time and money and effort goes into these things,” he said.

Roux said similar deals could be affected by the credit rating downgrade.

“What is likely to happen, if we don’t stabilise this economy and knock some sense into everyone’s head, is that you’re going to see inflation rising, interest rates rising and a slower growth rate and corporate activity,” he said.

In downgrading South Africa to junk status S&P Global Ratings said earlier this month the government’s firing of its internationally respected finance minister posed a risk to fiscal policy.

Analysts say the Treasury may struggle to borrow the extra money it needs to plug the wide budget and capital deficits, as well as meet wage demands from civil servants, after the downgrades to junk by both S&P and Fitch following Zuma’s sacking of Pravin Gordhan in late March.

The rand has tumbled around 7 percent since Zuma recalled Gordhan from an overseas trip prior to firing him. The drop has prompted the central bank to warn that the currency now poses the biggest risk to the inflation rate.

Ryan Woods, a trader at Independent Securities, said it was not unusual for sovereign downgrades to affect investment decisions.

“Part of the pricing had been put in place already, the market had pre-empted that some sort of deal was going to take place and now they’re adjusting their positions because that is now off the table,” he said of the Pioneer transaction. (Additional reporting by Olwethu Boso in Johannesburg; Writing by James Macharia; Editing by Greg Mahlich)

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