Dean Best

Focus: Premier asset sales fail to quell concerns

By Dean Best | 6 July 2012

Concerns in the City that Premiers balance sheet will still be under pressure after disposals

Concerns in the City that Premier's balance sheet will still be under pressure after disposals

Premier Foods plc, the UK food group, today (6 July) announced another asset sale. It has sold ethnic flour business Elephant Atta to Associated British Foods, its latest disposal of businesses it deems "non core" as it looks to strengthen its finances. There are some concerns, however, that the deals already announced - and those in the offing - will be enough to ease the pressure on Premier. Dean Best reports. 

Premier Foods plc today sold off another asset in its bid to improve its finances and turn around the business after a tumultuous few years.

The company this morning (6 July) announced it had sold ethnic flour business Elephant Atta to UK rival Associated British Foods for GBP34m. The sale follows last month's disposal of its vinegar and sour pickles business to Japan's Mizkan for GBP41m. Premier is trying to raise GBP330m from asset sales to cut debt and strengthen its balance sheet.

However, the two recent disposals prove the UK manufacturer is finding it difficult to reduce the debt pressure on its balance sheet, a City analyst warned. Panmure Gordon analyst Graham Jones said the two recent deals show Premier is finding it tough to ease the pressure on its finances.

"While an absolute reduction in debt of GBP75m may be welcome, Premier has lost GBP12.6m of annual solid, reliable cash generation. As such, these deals hardly move the needle on debt forecasts if you look out three or four years. It also means Premier has a smaller cash generative base from which to service its huge pension liabilities," Jones said.

Jones argued the price Premier received for the Elephant Atta business was "disappointing for a category-leading brand with such high margins".

He added: "We estimate it is 4% dilutive to estimated 2013 earnings, but obviously does little to reduce gearing, which after two recent disposals, on our estimates, remains at 4.9x. We do believe these two deals highlight just how difficult it is going to be for Premier to reduce its gearing."

Speaking to just-food, Jones said he believed with further disposals, including the much-speculated sale of the Hartley's jam business, Premier would reach its GBP330m target. However, he said pressure would remain on the company's balance sheet unless it could improve the performance of the brands that it kept.

"I think they'll probaly get there. It's just the case that the balance sheet will remain fairly highly geared. They've got to get their trading performance improving and life remains difficult out there," he said.

Premier is focusing on eight "power brands", including Ambrosia custard, Sharwood's cooking sauces and Batchelors soups. Jones had identified four candidates for disposal - the vinegars business sold to Mizkan, the Elephant Atta unit, Hartley's and the plant behind dried foods including Birds custard. These assets, Jones said, should be sufficient to get Premier to its target, although he added further disposals depended on the future performance of its power brands.

"I still think the four disposals we identified should raise around GBP330m. Whether or not they need to sell more brands after that though depends on how successful they are at getting the trading performance of their brands back on track."

Others in the City were more sanguine about the latest deal from Premier. Shore Capital analyst Clive Black said: "The Elephant deal is a not knock out one for Premier but the group has to deleverage. If there are few buyers in town the vendor is in a weak position. Elephant isn't a core brand and we should remember that in time disposals will allow for a more cut of its cost base."

Black added: "Premier isn't in a strong position but management has stated that it does not have to sell its power brands to see through its plans. That said, a knock out offer for one of those eight brands would probably be seriously considered."

The Hartley's jam business or the sweet dehydrated powder assets including Birds custard look to be the next likely assets sold. Hain Celestial has been mentioned in reports as a bidder for Hartley's, while UK food manufacturer Symington's has been touted as a potential suitor for the Birds business. Jones believes Premier could get around GBP200m for the Hartley's spreads assets and around GBP65m in the dehydratyed powder sale. As yet, Premier has refused to be drawn on any speculation, preferring only to comment directly on assets when deals are announced.

Sectors: Bakery, Canned food, Condiments, dressings & sauces, Dried foods, Financials, Mergers & acquisitions, World foods

Companies: Premier Foods plc, Associated British Foods, Mizkan, Sharwood, Hain Celestial, Symington’s

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