The deal – announced today (January 27) – was “good news” for the debt laden food manufacturer, said Shore Capital. But Panmure Gordon worried the partnership would increase pressure on the firm’s remaining cash flow.
Shore Capital analysts Clive Black and Darren Shirley said the deal would deliver two powerful benefits for Premier Foods and its struggling Hovis bread and flour business.
First, the deal would inject new capital and talent into the Hovis business.
Second, it would allow management to focus on the development of its seven remaining Power Brands – Mr Kipling, Bisto, Oxo, Ambrosia, Batchelors, Sharwood’s and Loyd Grossman. The deal will allow “Premier Foods’ management to focus upon what is a decent stable of largely ambient grocery brands with robust margin credentials in the UK”, said analysts Clive Black and Darren Shirley.
Seven remaining Power Brands
Gores Group has agreed to pay £30M for a 51% controlling stake in the joint venture, with £15M being deferred dependent upon performance. The enterprise value is said to be £87.5M including working capital of £28.7M that is retained by Premier Foods. The new venture will comprise the Hovis brand as well as Mothers Pride, Ormo, Granary & Nimble and all of the of the company’s operational bakery and milling estate.
Shore Capital retained its ‘buy’ advice on Premier Foods stock.
But Panmure Gordon analyst Damian McNeela said the deal highlighted the urgent need to address Premier Foods’s capital structure. “Following completion of the transaction, Premier’s gross cashflow will decline by about 12%, increasing the company’s net debt/EBITDA [earnings before interest, tax, depreciation and amortisation] gearing ratio to more than 5x in financial year 2014E.”
While McNeela acknowledged the firm was making progress with the pension trustees, he worried the deal places further pressure on the cash generation of its grocery business. “Any cash generation from the Bread business is unlikely to ever make it back to Premier,” said McNeela. “Accordingly, if Premier wish to ‘normalise’ its capital structure, a combination of debt refinancing and a rights issue are likely to be required,” he added.
Panmure Gordon repeated its ‘sell’ advice on Premier Foods’ stock.
As far back as February 2013, NcNeela’s colleague Graham Jones, executive director of Panmure Gordon, predicted that Premier Foods might be forced to sell one of its Power Brands. “It might take the sale of Power Brands to significantly improve Premier Foods’ balance sheet,” Jones said at the time.
'No real surprises'
Investec analyst Nicola Mallard saw “no real surprises in the Gores deal”. While it would result insome modest cash inflow for Premier Foods, it could become more valuable if the Hovis brand can be reinvigorated.
The joint will venture will also “remove a difficult and lowly profitable business from the P&L [profit and loss account]”, she added, as it now becomes an associate investment.
“The market was pretty much discounting the value of Hovis – at the very least, this deal should stabilise the brand and could potentially build its future value.”
Investec retained its ‘buy’ advice on the firm’s stock.
Brand development firm Added Value judged the deal good for Premier Foods and the Hovis brand.
Matt Woodhams, the firm’s director, said: “This is a good move for Premier Foods – which carries huge debts as a result of its pre-recession funding model. It is also potentially good for the Hovis brand which has suffered from underinvestment.
“With huge debt to service and other higher margin brands, it’s understandable why Premier’s management wouldn’t be in a position to put money into Hovis. And the new structure will, in principle, make investment in the brand viable.”
‘Divisional contribution’
Meanwhile, in the year ended December 31 2013, the Hovis business recorded sales of £654.6M, the firm confirmed today. It made a ‘divisional contribution’ of £27.8M, EBITDA of £21.9M and trading profit of £6.3M. Gross assets of the joint venture were said to be £240.6M.
While Power Brands sales rose by 2.0% in the full year, they fell by 1% in the fourth quarter, reflecting the tough consumer environment and high promotional activity.
“The company is pleased to confirm that trading profit for the year ended December 31 2013 is expected to be in line with current market expectations, despite some challenging trading conditions during the year,” it said.
“Adjusted profit before tax is expected to be ahead of expectations for the year, reflecting a slightly lower net regular interest charge.”
More details of the joint venture are available here.