The debt-laden food manufacturer said in a statement today (November 6): “The company confirms it has appointed Ondra Partners to assist in developing investment options for the bread business, which include co-investment by a partner.” The financial consultant specialises in advising businesses on mergers and acquisitions.
But Premier Foods acknowledged the difficulties of finding a suitable partner. “There can be no certainty that a transaction will follow at any point in the future, but the company will provide updates as appropriate,” it said.
Shares in Premier Foods climbed by nearly 5% to 140p at the close of financial markets yesterday (November 5).
Earlier this year the firm spent £28M on restructuring its bread business – involving the closure of two mills and three bakeries – after losing a number of contracts. The bread business suffered a high-profile reverse last year when it lost a key contract with the Co-operative to Allied Bakeries.
It has also suffered high production costs and poor industrial relations.
Own-label ranges
Premier's bread business – which makes the iconic Hovis brand and own-label ranges for some of the UK's biggest supermarket chains – employs about 4,000 staff.
But City analysts Panmure Gordon remained unconvinced that such a plan would help Premier Foods. “We struggle to see how this would resolve Premier’s balance sheet issues and still believe the optimal solution is a significant rights issue to raise £250–£300M,” said its executive director Graham Jones.
The analyst predicted the bread business will make £28M of operating profit this year, representing a 4.1% margin. Earnings before interest, tax, depreciation and amortisation (EBITDA) was forecast at £46M.
“Premier’s Hovis brand has slipped from number two to number three behind Kingsmill this year, and we believe the price competition in the sector remains intense,” said Jones.
‘No longer an option’
He dismissed the potential for a full disposal as “no longer an option”, after press reports suggesting that Goldman Sachs was appointed last year to investigate the idea. Jones added: “Presumably Premier did not receive high enough an offer to make sense for it to go down that route.”
Premier Foods’ net debt at the year-end was predicted to be £858M, representing 4.8x EBITDA. But that excluded the pension fund deficit, while the current net present value of the cash flow commitments was estimated at about £275M.
“Even if they sell half the business and put the business into a 50:50 joint venture to raise £125M, we still believe a rights issue will be needed,” said Jones. “Equally we would think the pension fund trustees could ask for a cut of the proceeds given the deal would reduce the cash generative base of the group further.”
The analyst issued ‘sell’ advice on the firm’s stock.
Sky News reported yesterday that the manufacturer had approached “a string of private equity groups about the sale of a stake in its bread unit”.
City analysts have long predicted that the manufacturer would be forced to seek extra funding through a rights issue.