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January 13, 2009

Premier in a pickle

Shares in Premier Foods gained today (13 January) after the UK’s largest food manufacturer posted a jump in full-year sales and announced that progress was being made in its drive to cut debt. However, to some extent, this news was overshadowed by question marks over how Premier intends to raise capital. Katy Humphries reports.

Shares in Premier Foods gained today (13 January) after the UK’s largest food manufacturer posted a jump in full-year sales and announced that progress was being made in its drive to cut debt. However, to some extent, this news was overshadowed by question marks over how Premier intends to raise capital. Katy Humphries reports.


Premier Foods was in bullish mood this morning, posting full-year sales gains alongside the news that talks over its planned capital restructuring continue to progress.


In a trading update for the fiscal year ended 31 December, the maker of Branston pickle and Oxo gravy said that group sales had risen by 9%.


The company emphasised that gains were weighted towards the second half, when sales rose 10%.


“The thing that Premier has got is momentum,” a spokesperson for the company told just-food following the announcement.


“Faced with significant price inflation in the first half, the company was able to push through price increases. Then, despite the economic downturn, Premier saw strong sales growth in the second half.”


The company said that sales were driven by a powerful performance from its Hovis and grocery divisions.


“Grocery performed very strongly… and Hovis is going great guns,” the spokesperson said.


Sales of its Hovis brand, which saw significant investment during the year, are expected to increase by 13% year-on-year. Meanwhile, Premier’s grocery division is expected to post sales gains of 7% for the fiscal year, with growth weighted towards the second half when the unit saw sales up 11%.


However, the performance of the chilled and Irish unit failed to meet expectations, with sales increasing by just 5%.


“Although the chilled retailer-brand business benefited from additional contracts, its performance was below expectations over the Christmas period with ready meal sales affected by the economic downturn,” the company said in its trading statement.


Lower than expected sales at the unit are likely to have an impact on profits, with Premier issuing guidance slightly below analysts’ forecasts.


Premier said it expects its full-year trading profit to be in the range of GBP315m-320m and its full-year adjusted profit before tax to be GBP185m-190m. This is GBP5-10m, or 3-5%, below consensus estimates.


Despite this shortfall, Premier shares rose 4.17% to 37.5 pence at 3.17pm GMT, as investors looked to cash in on the potential benefits of Premier’s move to address balance sheet issues.


“Premier’s trading numbers were a little disappointing but the big issue driving the company’s share price is the view that the market is taking of Premier’s balance sheet restructuring. We continue to view this as positive,” Investec analyst Martin Deebo told just-food.


Premier has indicated that it aims to refinance its existing debt of GBP1.78bn in the next ten weeks. A spokesperson for Premier told just-food that the company expects to have in place a new capital structure by the end of its first quarter in April.


Reports have suggested that Premier plans to simultaneously launch a rights issue to existing shareholders while offering up as much as 40% of the company to private equity investors.


It is believed that the company intends to raise around GBP300m in this manner.


While Premier is clearly in dire need of a cash injection, there are concerns that any new share issue will dilute the value of existing investors’ holdings.


Shares have already lost about 90% of their value over the past year and increasing the number of shares will be a further dilutive move.


However, Premier shares are currently on a very low rating and, if the company’s balance sheet is brought back into line, investors are gambling that there would be a significant re-rating, offsetting any loss from dilution.


“They are attempting to balance the need to get out of the huge hole they are in without diminishing existing shareholdings,” Collins Stewart analyst Rob Mann told just-food. “They are trying to find a balancing point.”


To Mann, the answer is to raise capital by selling off brands.


Indeed, Premier announced today that it is preparing to ink a deal with French bakery group Nutrixo, which has made a firm offer of GBP38m for its Le Pain Croustillant and Sofrapain businesses. The company added that it is also in discussions about a possible sale of its Martine Spécialités business, although no firm offer has yet been received.


However, Mann said, this is simply not enough.


“The right thing to do is to sacrifice a brand or two. Is it imperative for the future of this business that they own Mr Kipling for the next 25 years? They could raise GBP250m through disposals and the rest could come from a new share issue, minimising dilution,” Mann suggested.


While Premier has repeatedly indicated its willingness to dispose of businesses in order to raise cash, the group has insisted that these disposals be non-core brands and in November the company turned down a GBP250m offer from United Biscuits for Mr Kipling.


At the time it was rumoured that UB was considering a direct approach either to Premier’s investors or lenders, speculation that UB declined to comment on.


While it is clear that Premier must take drastic action to reduce its debt levels, the debate over how to raise capital looks set to continue in the coming weeks. And with any new structure reliant on the approval of existing shareholders, Premier must be all-too-aware of its need to deliver returns.

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