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Premier Foods still in a pickle despite Sarson's sale
July 6, 2012 / 5:31 PM / 5 years ago

Premier Foods still in a pickle despite Sarson's sale

LONDON (Reuters) - Bird’s custard and chapatti flour are joining Hartley’s jam on the “for sale” rack of Premier Foods (PFD.L) as Britain’s biggest food group tries to reduce its hefty debts and meet bankers’ sell-off demands.

Weighed down by hefty debts taken on with its 1.2 billion pound ($1.88 billion) acquisition of Hovis and Mr Kipling group RHM in March 2007, just before the credit crisis and subsequent economic downturn, Premier is fighting for its life, contending with cashflow-sapping bank fees and the need to fill a hefty pension deficit.

The owner of a string of iconic British food brands sold its Sarson’s vinegar business for 41 million pounds last month, but with Premier’s bankers having demanded 330 million pounds of disposals, and bidding for Hartley’s starting at the lower end of expectations, Bird’s and Elephant Atta will also have to go.

“Premier has Bird’s and Elephant Atta flour up for sale, but the key will be the jams business, which could be worth around 200 million pounds and will be vital in Premier meeting its target,” said one source with knowledge of the situation.

The U.S. food group Hain Celestial (HAIN.O) is considered by industry sources to be in pole position to buy Hartley’s for about 200 million pounds after Duerr‘s, the British family-owned jam-maker, struggled to obtain financial backing for a bid.

“I think Premier was disappointed with early bidding, as it had hoped to get about 250 million pounds, but it is going through a second round,” a source close to Premier said.

Premier’s dehydrated powder plant at Knighton in central England, which makes Bird’s custard, Angel Delight desserts, Cadbury drinking chocolate and Marvel dried milk, is worth about 75 million pounds, analysts suggest.

Bidders are likely to be led by private group Symington‘s, which recently bought Unilever’s (ULVR.L) Ragu and Chicken Tonight sauces, and has a new private equity backer in Intermediate Capital Group and additional funding from its banks.

Leeds-based Symington’s and Associated British Foods (ABF.L), which owns the Patak’s ethnic food brand, are likely to lead the bidding for Elephant Atta, which is worth about 35 million pounds and is the UK market’s leading brand of flatbread flour, or “atta”, for making chapattis.

Panmure Gordon analyst Graham Jones said that even if the three sales are completed, Premier will still be highly geared and its debt-to-EBITDA profit ratio would fall only to 4.6 times by the end of 2013, against 4.9 times with no disposals.

He said that the group is likely to be paying 515 million pounds in bank fees and pension payments over the next five years to cover its huge debt and pay down a pensions deficit that stood at 535 million pounds in April 2010. Disposals are essential, but they will not miraculously bring the group back to health, he added.

“These disposals are, we believe, unlikely to be a panacea for Premier’s balance-sheet issues,” he said, adding that the group’s flour milling business might be sold, or even one of its eight key brands, such as Ambrosia and Mr Kipling.

New chief executive Michael Clarke, who joined from Kraft Foods KFT.N last September, gave Premier breathing space by agreeing a 1.4 billion pound refinancing package in March, which included the 330 million pounds of disposals due by June 2014.

He decided to focus on the group’s eight core brands of Ambrosia, Batchelors, Bisto, Hovis, Loyd Grossman, Mr Kipling, Oxo and Sharwood‘s, meaning that all other businesses could be sold to cut the group’s one billion pound debt.

Premier, which has annual sales of 1.8 billion pounds, also suffered last year as it raised prices too sharply in its attempt to offset higher commodity costs. This prompted Britain’s biggest supermarket chain, Tesco (TSCO.L), to de-list a quarter of its lines, costing Premier 10 million pounds.

The group’s shares have tumbled over the past three months as investors have become more risk-averse during the euro zone crisis. They closed at 88.5 pence on Wednesday, down from 185p in early April, making the group worth about 210 million pounds.

The shareholders are used to rollercoaster rides. Premier shares slumped from a high of 288p in February 2007 to about 30p at the nadir of November 2011, when the group appeared to be near to collapse.

In a reflective note, credit rating agency Fitch said that most well-known European food groups had a disciplined approach to acquisitions, by not overpaying and implementing successful integration - apart from Premier and its debt-fund RHM purchase in 2007. Fitch does not cover Premier individually for rating coverage.

Premier, which announces its half-year results on August 7, had no comment to make on any future disposals.

(This story was refiled to correct 1.8 million pounds to 1.8 billion pounds in para 15)

Editing by David Goodman

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