Despite its bid for Northern Foods failing earlier this year, Greencore has not lost its appetite for M&A with the announcement of a bid for food-to-go and desserts manufacturer Uniq. But, with the many challenges facing Uniq, and the UK private-label sector on the whole, is it a good investment? Petah Marian reports.

While Greencore might have failed in its bid to merge with Northern Foods earlier this year, its efforts to build scale have continued unabated with the announcement today (12 July) of a GBP113m (US$178.8m) bid for Uniq.

While broadly positive, reactions to the deal have been mixed, with Uniq facing challenges in its business and coming off an extended struggle over its pensions deficit.

The company could be seen as something of a risky proposition. Additionally, concerns remain among industry watchers that the improved scale of the new company will not give it enough clout to negotiate effectively with the major multiples.

Despite Uniq’s desserts business remaining loss-making and in the midst of restructuring efforts, its sandwich business remains an attractive proposition.

Greencore CEO Patrick Coveney described the company’s sandwich business as the “jewel in Uniq’s crown”. Indeed, in recent quarters the company has reported good momentum in its food-to-go business, with sales up 11.2% over the first half. Sales declined in the desserts business over the same period, due to its exit from cottage cheese and the loss of its “everyday desserts business”. However, Uniq has recently reported growth from its premium desserts business.

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Uniq has effectively been up for sale since April when its majority shareholder, the trustees of the company’s pension fund, said they were looking to sell “all or part” of their stake in the business.

Uniq announced in April that it would cede a 90% stake in the company to its pension fund in order to tackle a GBP436m pension deficit from when it traded as Unigate.

Signs of pressure from the pensions debt became apparent as long ago as 2006 when Uniq sold its French spreads business to pay down debt and to help address its UK pension deficit.

Greencore believes the acquisition of Uniq will “”broaden Greencore’s commercial footprint” and said the move “represents an important milestone as we extend the scale and leadership positions of our group in the UK convenience market.”

Greencore has learned from the mistakes made with its bid for Northern Foods and has secured an “irrevocable undertaking” from the group’s pension trustees to accept its bid.

Greencore, which Coveney said, has “long believed consolidation can lead to better scale”, sees upwards of GBP10m in synergies through the deal.

He expects that the elimination of duplicated corporate and divisional costs will deliver some GBP5m in savings, and a further GBP5m in purchasing and supply chain synergies, with potential for incremental revenue and capability synergies “over time”.

Coveney emphasised that that the two companies have complementary customer bases, highlighting how Greencore serves Asda, Morrisons, Waitrose, Sainsbury’s, The Co-operative and Boots for sandwiches, while Uniq serves Marks and Spencer.

While the move was largely welcomed by analysts, the market respond as positively, with shares in the convenience foods manufacturer sliding more than 11% to EUR0.85 a share at 12:30 BST today. Rather than the share price falling due to negative sentiment towards the deal, Greencore’s stock is likely to have been hit today due to concerns over it’s planned EUR80m share issue to fund the deal.

Nevertheless, Shore Capital analyst Darren Shirley described the deal as a “logical” one adding that the deal has “considerable merit in our view and broadly speaking, it is a deal that we give our approval to”.

Shirley said Greencore was set to acquire a “high-quality food-to-go business” but said Uniq’s desserts unit was “more questionable”. Uniq makes desserts in two sites, one of which, in Minsterley, has “proved to be something of a problem child” for the company, the analyst said.

However, Shirley said he expects Greencore to continue with Uniq’s restructuring plans for Minsterley, which, could, he said take the business back into the black by the end of 2012.

Meanwhile, MF Global analyst Andy Smith said he accepts the “strategic rationale” for the Uniq deal, highlighting how it will add “new and complementary customer relationships” for Greencore, particularly with Marks and Spencer, with whom he notes the Irish firm “only has modest exposure at present”.

However, Smith remains dubious that Greencore’s improved scale will give it the clout it needs to negotiate effectively with the multiples and about the the private label food sector’s ability to compete successfully on the whole.

“We also feel that private-label food producers are likely to continue to suffer from the twin issues of input cost pressure and the dominance of the multiple retailers, despite the deal to an extent strengthening Greencore’s position in this latter regard,” said Smith.

He also suggested that the deal makes it “less likely” that Greencore will be acquired by either Associated British Foods or private-equity group Doughty Hanson – both of which have been linked to the company.

And Greencore’s plan to acquire Uniq could have a further consequence. The Irish firm has been linked to Premier Foods plc’s own-label unit Brookes Avana, which saw profits slump in 2010.

Shirley suggested that Greencore’s move for Uniq is likely to be a blow for the embattled Premier. Brookes Avana, the analyst said, was likely to have been high on Greencore’s “maybe acquire list”.