Cadbury and Premier Foods shape up finances

Cadbury has raised £300M in bonds in a move to “reduce short-term borrowings” and ease worries over its debt pile, which was valued at £1.89bn in December 2008. The deal, which was announced last week, was made with four banks including HSBC, Royal Bank of Scotland, Bank of America and BNP Paribas.

“This is a prudent move for us,” said a spokeswoman for the company, “and is a significant achievement given the current economic environment.” She said that the move would help straighten out the company’s balance sheet, which has seen a dramatic improvement since December 2007 when the company’s debts were £3.2bn. The improvement was the result of the company’s demerger of its beverage business throughout 2008.
The impending sale of Cadbury’s Australian beverages business would also reduce debt levels by a further £475M after tax and fees, according to Graham Jones, analyst at Panmure Gordon. He forecast that Cadbury’s debt would stand at around £1.35bn by the end of 2009. “When this deal goes through, Cadbury’s balance sheet will be in a much better shape,” he added. “But this is not so much the case for Premier Foods, which also announced plans to reduce its debt last week.”
According to Jones, Cadbury was able to borrow cheaply at a low interest rate of 5.375%, as opposed to Premier Food’s 8.1% interest rate. His comments come as Premier Foods announced that it had extended its banking facilities until December 2013 to give it more financial headroom. It also launched a £404M rights issue alongside an investment from private-equity firm Warburg Pincus.
“The difference between Cadbury and Premier Foods,” explained Jones, is that “the value of Cadbury as a company is much more in line with its debt, unlike Premier which has a significantly larger debt than value.”
On March 6 Barclays disclosed a short position relating to its shares in Premier Foods. Despite a short-term boost in its share prices, on the back of the announced rights issue (shares rose over 20% to reach 35p on Thursday) Barclays expected their value to fall again.