March 23, 2016 / 8:41 AM / 4 years ago

UK's Premier Foods spurns McCormick's $700 million takeover approach

(Reuters) - Britain’s Premier Foods (PFD.L) has rejected a second takeover approach from U.S. peer McCormick & Co (MKC.N), saying the roughly $700 million equity price tag undervalued the maker of Mr. Kipling cakes and Bisto gravy.

Shares in Premier soared 64 percent to 51.75 pence at 1515 GMT, still short of the mooted 60p proposal price.

The value of Premier Foods has been depressed by a high debt load and pension obligations, but it offers a range of mainstream grocery brands that are slow-growing but profitable.

In buying them, McCormick would be using a tried and tested strategy followed by serial deal-maker 3G Capital in its formation of Kraft Heinz (KHC.O).

“It’s more of a value strategy rather than a growth strategy,” said Davy analyst Declan Morrisey.

Premier said on Wednesday that McCormick first approached it on Feb. 12 with a possible offer of 52 pence per share, which it rejected. On March 14, McCormick put a possible 60 pence per share on the table, which Premier also dismissed as too low.

At 60 pence, McCormick, known for its flagship spices and Lawry’s seasonings, is valuing Premier’s equity at about 496 million pounds ($704 million), based on Reuters data. Premier also had debt of 585 million pounds as of last November.

McCormick, confirming the approach, said it would finance the takeover from existing resources and new debt facilities. It said there was no certainty it would make a firm offer and that it would make a further announcement in due course.

Under British takeover rules, the U.S. company has until April 20 to make a firm offer.

“McCormick’s proposal significantly undervalues the business,” Premier Chairman David Beever said in a statement.

“(It) fails to recognize the value of Premier’s performance to date and prospects for the future, including the strategic plans we have to accelerate growth.”

JAPANESE LINK

Premier raised its medium-term sales growth forecast to a range of 2 to 4 percent, from 1 to 2 percent, helped by a broader roll-out of its packaged snack cakes, the extension of its grocery brands into more premium, chilled categories, and stepping up its international expansion.

To that end, Premier said it signed a cooperation deal with Japanese instant noodle maker Nissin Foods (2897.T) that could see Premier sell Nissin’s products in Britain and Nissin sell Premier’s overseas.

The deal could also see Nissin take a stake in Premier Foods and gain a board seat if its stake was 15 percent or more, according to a statement. Nissin said it does not plan to make an offer for Premier for at least six months.

McCormick said buying Premier would complement its own portfolio, which includes Schwartz seasonings and Thai Kitchen sauces, and increase its presence in Britain, as well as grow Premier’s overseas presence and cut costs.

“CHEEKY OFFER”

Premier Foods was once Britain’s largest food group, but has sold off lots of assets during a restructuring aimed at reshaping its business, cutting costs and reducing debt built up after an acquisition spree.

In 2014, it gave up control of its struggling Hovis bread business and announced a 1 billion pound refinancing plan, but has kept mainstream brands such as Ambrosia rice pudding, OXO stock cubes and Batchelors soups.

Still, its shares have traded below those of its peers, largely reflecting its debt load and pension deficit rather than its underlying business, which Investec analyst Nicola Mallard said should be the basis of a takeover offer.

“If they were part of a bigger business, those financial issues in theory would reduce,” Mallard said, noting that her target price on the stock is 52 pence.

“I think 60p, as much as it’s a long way above the 32p hey’re trading on, is a cheeky offer,” she said.

Premier is being advised by Ondra Partners and HSBC while McCormick is being advised by Goldman Sachs and Rothschild.

Additional reporting by Vidya Nathan in Bengaluru and Freya Berry and Pamela Barbaglia in London; Editing by Alexander Smith and Keith Weir

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