The industrial logic behind a Greencore/Northern merger is stronger than a deal with Boparan

The industrial logic behind a Greencore/Northern merger is stronger than a deal with Boparan

Shareholders in Northern Foods could be forgiven for feeling confused.

Two months ago, the UK food group, a key supplier to the country's multiples and owner of brands like Fox's biscuits and Goodfella's pizza, looked set to merge with Greencore, the Irish food maker and rival own-label supplier on this side of the Irish Sea.

The merger, shareholders in Northern and in Greencore were told, would create Essenta Foods, a company with annual sales of GBP1.7bn and one that would enjoy greater bargaining power when dealing with the UK's powerful grocery retailers.

"We are creating an exciting new food company, that in truth is not a merger of equals or the best of both, but a better than both in terms of the outcomes we are seeking," Greencore chief executive Patrick Coveney said on the day the merger proposals were announced.

As well as the greater clout when dealing with UK supermarkets - a factor many analysts touted as a key benefit of the merger - the detail of the deal revealed that Northern's pension deficit would be paid down year by year, while the combined business would enjoy annual synergies of around GBP40m. All seemed set fair for 31 January this year, when Northern and Greencore shareholders would vote on the merger plans.

However, steadily, the head of one of the UKs largest meat suppliers built a stake in Northern, moves that fed speculation of a rival bid for the business. On Friday evening, after weeks of rumours, Ranjit Boparan tabled a GBP342m offer for Northern through Boparan Holdings, his poultry and fish giant that owns companies including 2 Sisters Food Group and the Harry Ramsden's fish and chip shop chain.

Mr Boparan was said to be dubious about the cost savings Greencore and Northern said their merger would generate. On Friday evening, as Boparan Holdings' counter offer was announced, Mr Boparan said the combination of his company with Northern would create one of "Britain's major food suppliers". The tycoon's plans, he said, would benefit "customers, consumers and employees".

Boparan Holdings' offer was accepted by the Northern board, which immediately withdrew its recommendation for shareholders next week to back the merger with Greencore. Directors have a fiduciary duty and Boparan Holdings' bid means Northern investors would receive a whopping 81% premium to what the merger with Greencore deems their shares to be worth.

Commenting on the offer, Northern's chairman Anthony Hobson focused squarely on the cash element of Boparan Holdings' bid. "This attractive cash offer provides shareholders with an immediate premium to the value of Northern Foods within Essenta Foods, " he said. "[The] bid from Boparan is a compelling opportunity for our shareholders to realise a cash exit, and as such the board of Northern Foods will be unanimously recommending that Northern Foods shareholders accept Boparan's offer."

The merger with Greencore lacked a premium for Northern investors - a factor that was also said to have disappointed Mr Boparan - and some of the company's shareholders will no doubt welcome the extra cash from the latest offer for the business.

However, there is an industrial logic behind the merger of Greencore and Northern that a combination with Boparan is unlikely to match. Greencore and Northern have businesses in a number of categories and, crucially, the creation of Essenta Foods would take out capacity in the UK's chilled convenience food sector, a market where suppliers have struggled to make decent returns in recent years.

Boparan Holdings, being a private-label supplier itself, could generate some synergies but the overlap between Northern and Greencore is greater and the prospect for savings higher.

Nevertheless, despite the prospects for greater long-term value, Northern investors could be lured by the cash on offer, meaning Greencore is likely to have to return to the table with a new bid that includes a cash element. Greencore refused to be drawn on its plans when questioned by just-food today but reports are already suggested the Irish group is likely to come back with a better offer.

The race for Northern is not over just yet.