Investec analyst Martin Deboo views the refinancing deal as a positive move for Premier Foods

Investec analyst Martin Deboo views the refinancing deal as a positive move for Premier Foods

News this week that Premier Foods plc has secured a debt refinancing deal that could secure its future has followed a year of turbulence and uncertainty over the direction of the UK food giant. However, as Michelle Russell writes, the City remains unsure about the company's future.

The Premier Foods plc deal to refinance its debts was welcomed by the City this week. However, a shadow remains over the Hovis maker's business.

Premier managed to secure itself some much-needed breathing space from banks and pension trustees earlier this week through the agreement of a four-and-a-half year refinancing package that will allow it push ahead with its new growth strategies.

Faced with high debts and in the wake of two profit warnings in 2011, Premier, under new CEO Michael Clarke, has been offloading assets to strengthen its balance sheet and refocus the business.

In December, the firm signed an agreement to sell its Irish business to The Boyne Valley Group. The EUR41.4m (US$53.9m) deal included its Chivers, Gateaux, and McDonnells brands, as well as a licence to the Erin brand.

In the same month, Premier sold its Brookes Avana business as part of its strategy to save around GBP40m by 2013.

Those moves followed disposals made under predecessor Robert Schofield earlier in the year, when Premier announced deals to sell its meat-free and canned food operations.

Moreover, last month, the UK's largest food manufacturer, which also produces brands such as Ambrosia, Mr Kipling and Bisto, shuttered one of its Hovis bakeries as part of "ongoing efforts to improve the utilisation and cost effectiveness of the Hovis supply chain".

The cuts were in addition to plans to reduce around 5% of its total workforce by the end of the year, signalling that something had to give in order for the firm to lift itself out of the doldrums.

Investec analyst Martin Deboo views the refinancing deal as a positive move for Premier, allowing the firm's management room to turnaround the business.

"It will also materially benefit earnings and cashflow over the next two years on the back of the commutation of expensive swap interest to a lower rate term loan, respite from pension deficit payments and improved headroom on lending facilities," he adds.

Clive Black of Shore Capital echoes this sentiment. The move was "encouraging", given that the company "could not press on as a business until its balance sheet matters were more robust," he says.

Under the terms of the refinancing package, banking facilities of GBP1.2bn (US$1.87bn) have been extended from December 2013 to June 2016. Covenants have also been re-set to reflect Premier's plan to focus investment behind eight 'power brands', as well as reduce costs and offload selected businesses.

The total interest rate swap portfolio, including previously restructured swaps, will be restructured into an additional term loan of around GBP200m. Additionally, the trustees of the group's pension schemes have agreed to defer deficit contribution payments until 2014.

While the move suggests an optimistic outlook for Premier, there remain a number of challenges for the firm.

Deboo believes that Premier's financiers clearly do not want the company to fail. Through the refinancing deal it will be saving some "tens of millions". However, Deboo adds that the move will be "no free lunch" and will likely come with a hefty price tag.

"The good news is that Premier's bank lending margin won't be increasing. This represents a major coup in our eyes. However, there will be, as yet, undisclosed costs beyond 2016 and we suspect that, as at its March 2009 refinancing, Premier will pay a whopping arrangement fee (which we have been provisioning at GBP25m in our numbers). Plus there is the probably interest rate premium on the GBP200m term loan."

Panmure Gordon analyst Graham Jones, however, highlights concerns over current trading conditions, an issue voiced by Associated British Foods recently, in particular for UK bread, given reports of a recent doubling in wholesale egg prices - a key ingredient for cakes.

He also questions whether further disposals, resulting in a further shrinking of Premier's cash generative base, will make its pension liabilities look even larger, relative to the size of the group.

Premier has reiterated its plan to focus investment behind its eight 'power brands' of Ambrosia, Batchelors, Bisto, Hovis, Loyd Grossman, Mr Kipling, Oxo and Sharwood's. The rest, it seems, are on the chopping board. These include brands such as Hartleys, Branston, Sarson's, and Haywards, which remain cash generative.

Reports early this year suggested that Premier was looking to sell its Hartley's jams and Haywards pickles businesses for around GBP200m, so this would come as little surprise to many. However, more surprisingly, one of the firm's power brands, Ambrosia, has become the subject of purchase speculation amongst analysts.

On the news last week that Dairy Crest is considering the sale of its French spreads brand, St Hubert, Panmure analyst Damian McNeela suggests that Premier's Ambrosia brand "could make sense" as a replacement.

It is not clear which brands, if any, Premier will dispose of, but with two profit warnings under its belt in the last 12 months, and the departure of chief executive Robert Schofield last year, investors may well have been pondering the very existence of the Hovis and Bisto maker.

The restructuring certainly appears to be a step in the right direction, but while this may indeed have given Premier some breathing space, it seems there remains no hiding place from the reality of having to improve trading in this deeply troubled business.

As Deboo says: "While Premier's saloon has proved to be one hosted by a patient and accommodating bartender, as we expected when we turned buyers last November, it is for us still very much a saloon of last chances."