Cost savings from Premier/RHM merger ‘deliberately’ understated, says analyst
The integration of Premier Foods and RHM is progressing faster than expected, and will deliver “significantly more savings than targeted”, according to business analyst Panmure Gordon.
Premier Foods has dramatically increased in size in the last two years following the acquisitions of RHM, Campbell Soup and Chivers Ireland. However, many analysts have since questioned its aggressive acquisitions strategy, claiming that bosses are building a large, unwieldy conglomerate like Hillsdown Holdings and notching up excessive debts. Meanwhile profits at its bakeries have slumped as wheat prices have gone through the roof.
However, the structure of the combined business was far from unwieldy, claimed Panmure Gordon. “Rapid progress is being made at RHM, with the head office closed in June and the integration of all three divisions commenced ahead of schedule. The new grocery division is likely to see factories reduce from 21 to 12 over the next six quarters and, coupled with centralised sales and support functions, creates a very lean operating structure. Premier will combine unparalleled scale in UK food with a lean operating structure. The critics who suggest it has simply become a bigger RHM or Hillsdown are, in our view, very wide of the mark.”
Owing to the huge overlap in manufacturing, distribution and support functions, it added, “we believe Premier’s target of £113M of cost savings is a deliberate understatement. We think the integration is progressing faster than expected, and will deliver significantly more savings than targeted, enabling an additional £25M to be put behind the RHM brands.”
Premier has already integrated Campbell and has turned a 4% sales decline on acquisition back to growth, it added. As for wheat prices, which have dented profits at all bakeries in recent months, things were beginning to stabilise, it claimed. “Spot prices have now stabilised at £170-180/t, compared to the peak of £200/t in early September. Futures prices have fallen further and since mid-October have settled at around £160/t for January 2008 delivery.”
Cost savings from closing Premier’s Plymouth bakery were estimated at £1M-2M, while the closure of the Bradford bakery and depot at Telford could save the company £10M on an annual basis from 2008, it added. If some kind of deal were created to fulfill chief executive Robert Schofield’s vision of a more collaborative distribution system for bread between the key players, this could also generate significant savings, added the analysts. “Given that we are probably some way off any agreement, and there can be no certainty of a deal taking place, we have not put any benefits into our forecasts, but we believe the distribution cost savings would run into tens of millions of pounds.”
Premier’s part-baked factory in Southall (Le Pain Croustillant) and four French frozen bread factories (Sofrapain) were unlikely to be a “major focus going forward”, it predicted. “We do not believe they can be dramatically profitable and would not be surprised if Premier were to exit these at some point.”
Premier Foods is the largest food supplier to the UK grocery chain. Key brands include Hovis, Mr Kipling, Sharwoods, Bisto, Batchelors, Oxo, Quorn, Branston, Ambrosia, Loyd Grossman, Hartley’s, Birds, Homepride, Crosse & Blackwell, Cauldron and Sun-pat.
