Premier Foods’ dilemma: Disposals needed but will bread go?
In March, the group reported a £259.1m (€312.6m) pre-tax loss for the full year, with its bread arm nose-diving sharply by 90.4% with a yearly trading profit of only £3.4m (€4.2m).
Investment bank, Panmure Gordon & Co, said it expects Premier’s debt to sit at £1.2bn (€1.49bn) for the rest of 2012.
“Disposals are therefore essential to rehabilitate the balance sheet,” Panmure said.
Disposal options
Premier identifies its eight ‘power brands’ as Hovis, Mr Kipling, Batchelors, Bisto, Ambrosia, Sharwood’s, Loyd Grossman and Oxo. These were unlikely choices for sell-offs, Panmure said, “although we wouldn’t rule it out if an attractive offer was to be made”.
“We assume that Premier would want to avoid, if possible, selling significant brands which are manufactured within key ‘power brand’ factories given that this could lead to unhelpful operational degearing,” it said.
The investment bank identified three facilities it said Premier will likely rid of – Histon (jams, jellys and spreads), Knighton (dehydrated powders) and Middleton (vinegars and pickles). “None of these produce any power brands as far as we are aware, and could be easily sold, in our view as stand-alone entities,” it said.
Clive Black, director and head of research at Shore Capital, said that “it will be secondary brands and private label activity,” focused on during disposals.
Black suggested that, following a meeting with Premier Foods’ management, a sell-off of its own-label bread could be on the cards.
Premier last year disposed of Meat Free, Canned, Brookes Avana and Irish brands and the group has already committed to £330m (€410.8m) of disposal proceeds by June 2014.
More disposals will be needed
“Premier may need to exit further businesses,” Panmure said, suggesting that Milling, or Manor Bakeries could be an option.
“The disposal of a larger, priority, business would clearly represent a u-turn in thinking for the new management team, but could, in our view, be the only way of making more significant in-roads into Premier’s debt mountain,” the bank said.
Panmure predicted a steady recovery in Premier’s bakery margins from 4% in 2012 to 7.5% in 2016, “although margins in bakery have historically been more volatile than our forecast of steady margin improvement suggests.”
“What would be a game changer in bread margins would be the long mooted reorganisation of industry distribution, which is hugely costly and inefficient,” it added.
Panmure predicts bakery sales for the group to hit £708.2m (€881.7m) for 2012 – a figure it forecasts will steadily increase to £723.6m (€900.9m) by 2016.
