Premier Foods removed some uncertainty last week after installing a new chairman and permanent CEO but then added another element by revealing its finance chief will leave the heavily-indebted UK food manufacturer. Simon Harvey looks at the road ahead.

Shares in Premier Foods headed higher last Friday (30 August) morning after the UK-based Sharwood’s sauces and Saxa salt owner finally announced a new chief executive, bringing an end to more than six months without a permanent CEO.

The stock was up more than 1% in morning trading, while the FTSE Small Cap index on which it is listed was flat, after the company revealed Alex Whitehouse would relinquish his position as managing director of UK operations to become group CEO of a business that’s been struggling to get sales going with any notable traction across its whole brand portfolio in recent years. 

But perhaps more significant was a new chairman in Colin Day, who spent a decade at food firm Reckitt Benckiser as finance chief and was recently the CEO of London-listed Essentra, which produces electronic components and associated accessories, along with two non-executive directors. Day also sits on the board of the UK government’s Department for Environment, Food and Rural Affairs (Defra). 

Notwithstanding, Premier is now faced with another gap in its senior management after simultaneously announcing finance chief Alastair Murray is departing following a six-year stint as CFO, as well as holding the acting CEO reins since Gavin Darby left in January. And the stock closed flat on Friday after giving up its initial gains.

One has to wonder why Premier Foods opted for an internal candidate after so long, opening up a debate as to whether any potential CEOs were willing to take on the job of helming a business stuck with legacy brands such as Angel Delight desserts and Ambrosia rice pudding, while more importantly also having to deal with agitated shareholders unhappy with both the financial performance and strategy under previous management.

Darby eventually departed under his own steam having survived a vote of no confidence from some of Premier Foods’ main shareholders some of which now have representatives on the board. One of the shareholders, investment fund Paulson & Co., was earlier this year reportedly behind a plan to break-up the group, presumably into more manageable assets, but also to explore a wholesale disposal. In July, Premier chairman Keith Hamill left the business after less than two years in the job. 

Despite the Friday morning gains in Premier’s share price, the stock closed the day on Friday flat at 32.75 pence, while the Small Cap index was up 0.2%. But with many market participants returning from the summer holidays on Monday, the stock rose 5.8% within 15 minutes of the open to 34.60p but is still off a peak of around 59.50p reached in 2016, the highest level of the past five years.

Hindsight is a wonderful thing, but it was no doubt a missed opportunity when the Premier board batted away an approach by US spice maker McCormick & Co. to buy the company in 2016 for 65p a share, which would have valued the business at GBP1.5bn (US$1.8bn today) at the time including debt.

New appointments aside, Premier is still saddled with debt and a pension fund deficit, with asset disposals the most obvious solution to tackle those. But at what price to garner a big enough cash pile to provide value for shareholders, while at the same time raising enough to pay down debt and reduce pension liabilities?

On a more positive note, new chairman Day is considered by the market to be a strong character with the credentials to deal with a board of directors and shareholders pressing for change but it remains to be seen what he or CEO Whitehouse can bring to the table to pull Premier out of the mire with respect to dealing with the debt and pension commitments.

“We see these appointments as a positive event, both in terms of the quality of the individuals and the resolution of uncertainty: Colin Day brings top-tier leadership and governance experience, plus a consumer focus,” investment bank and financial services firm Jefferies says in a research note. “Alex Whitehouse has presided over a marked turnaround of performance in Premier Foods’ UK business, reflected in eight consecutive quarters of growth in the core branded business.”

Clive Black, a consumer goods analyst and head of research at Shore Capital, says his firm is not going into share-buying mode just yet even though he has some positive overtones about Premier Foods and its brands.

“What Colin and Co. can bring to the party is going to be very interesting and potentially fascinating to watch,” Black tells just-food. “Colin Day is a powerful character and I think it’s interesting they’ve managed to attract him.

“The share price reaction today [Friday] says we understand the virtues of Colin Day but, even with that, we are not prepared to go and mark the price up yet.”

To his credit, Darby achieved some success in trimming Premier’s debt pile, which stood at GBP470m for the most recent full financial year ended 30 March, compared to GBP523m two years earlier. But Premier still faces a pension fund deficit of GBP464.7m.

Premier has made some inroads in reducing its leverage, which was down to 3.2 times last year with a target of three times net debt-to-EBITDA by 2020. 

Putting those numbers in perspective, the company generated revenues of GBP824m last year (up 0.6%) but recorded a loss attributable to shareholders of GBP33.8m versus a GBP7.2m profit a year earlier. Profit before tax delivered a loss of GBP42.7m.

Black continues: “This is a business that’s been over indebted for years and years. It’s not a bad operator, it’s not as if there’s loads of low-hanging fruit to fix, and it’s got quite robust margins. But, at the end of the day, it’s a business where the bankers and the pension fund are more important than the shareholders.” 

If asset disposals are the way forward to trim liabilities and get the share price back on track, then what brands do you chose to ensure you are left with a viable business, unless another McCormick comes along? At least the share price is attractive albeit with all the same baggage.

Former chief Darby had already started the process to streamline the portfolio, beginning with an attempt to sell the Ambrosia brand to raise funds to put into other areas of the business, but he couldn’t bring it to fruition at a decent price tag. 

Speculation had also swirled that the former CEO was considering offloading Mr Kipling cakes and Batchelors, despite reinvigorating the latter by extending the brand from soups into snacking noodle pots and seeing sales rise 12% last year. Perhaps bringing more product innovation in is the way forward to shore up the portfolio to make room for less profitable disposals as was the case with the recent launch of a Plantastic plant-based range to try and keep in tune with current trends, although as ever with innovation comes risk.

Black says: “In terms of the brand portfolio, [Premier’s] in the space where supermarkets are, in the main, rationalising footage, so it’s really important they have a leading market position. What their actual scope is though is to build volume and value in their brands supported by appropriate and competitive marketing. That’s been the biggest constraint of Premier Foods. They worked hard to create some wriggle room to support the likes of Mr Kipling and Batchelors in recent years but they haven’t been able to support all [the brands] at the same time.”

It might be construed that if you are going to let well-known brands go such as Mr Kipling, Bisto gravy and Batchelors – deemed to be the three-largest brands, respectively – you might as well sell the business in its entirety. Individual asset disposals on the other hand might have to go at an inflated price tag to generate sufficient funds to pay down debt and cut the pension deficit, but at the same time making them less attractive, as was seemingly the case with Ambrosia.

And as Nicola Mallard, a senior research analyst at Investec Securities, points out, if you have a crossover in manufacturing across different brands then letting assets go is not going to be as straight forward as it might seem.

“The things that are easiest to sell are going to be your better brands and therefore the ones that are driving the growth,” says Mallard. “What do you end up left with? You still want to have something left within the business to make it a viable concern. So it’s a bit like selling the crown jewels really but if that’s the only thing you can sell then that is a debate the board has to have.”

It remains to be seen what outcome will emerge from the ongoing strategic review, started by Darby and continued by Murray, which might be interrupted by the new appointments, or perhaps not, depending on what the largest investors in the form of Oasis, Nissin and Paulson are pressing for. For the time being though, it may be left to the biggest shareholders to decide the way forward for Premier and it’s anyone’s guess as to what bearing on the process a new chairman or CEO might bring.

“It’s not a zero-risk appointment,” Mallard says in terms of a new CEO. “You’ve got a business with too much debt and a fairly high pension fund and two activists on the register, which may or may not be agreeing on what is the best way forward. 

“If it’s not an external appointment you haven’t necessarily got anyone coming in with a grand plan that’s vastly different. They are having a strategic review and at some point that is going to come out with potentially some value-adding idea. Colin Day is a very strong character, so he’s probably got the right characteristics to take on that sort of board because you’re going to need to take a very firm stance in terms of the decisions that need to be made.”

Jefferies argues asset disposals should only be pursued if the right price can be attained along with a buffer for debt and pension fund liabilities. But equity analyst Martin Deboo, writing in a research note last summer, said it’s difficult to get “better than high- single-digit exit multiples for mature UK food assets”.

No doubt something at Premier is going to have to give or someone is going to have to make concessions to get the share price moving with any momentum again, whether that be a piecemeal disposal of assets or a wholesale sell-off of the business. 

Perhaps decisions have already been made by the board and activist shareholder representatives before the new chairman and CEO embarked on their new adventure. We will have to wait for the outcome of the strategic review on all fronts.

“How they engineer it, how they package it and change it is going to be fascinating,” Shore Capital’s Black says. “But it’s not that this business has lacked advisers over the years in terms of trying to get a more satisfactory outcome for shareholders. In terms of what Colin Day brings with his two non-executives in terms of delivering a notable structural increase in value in Premier Foods’ share price, we will watch and wait.”