Three weeks after Premier Foods revealed McCormick & Co.’s interest in buying the UK group, its US suitor has, after seeing three proposed offers turned down, decided to walk away from the table. Premier insists it has a “strong future” as an independent company. Dean Best reflects on a tumultuous 21 days and considers what lies ahead for the Mr Kipling maker.

McCormick & Co. had been pursuing Premier Foods plc for two months and had no doubt been weighing up its interest in the UK company for longer, so it was a surprise yesterday (13 April) to hear the US group had lost its appetite for the business behind brands including Mr Kipling cakes, Ambrosia custard and Bisto gravy.

On 30 March, Premier’s board rebuffed a third proposed offer from McCormick, insisting the 65p-a-share indicative bid continued to “undervalue Premier and its prospects”. It was a brave stance from the board, given the criticism that came its way from some of Premier’s main shareholders. They had rebuked the UK group for what they saw as the company failing to engage with McCormick on proposals that started at 90% above and ended up more than double the price of its shares before the US spice maker’s interest became public. Among some Premier investors there had also been disquiet at the way its prospective distribution partner Nissin Foods Holdings, the Japanese group, had built up a 19.9% stake in the company.

As well as rejecting McCormick’s latest proposal, Premier did say it was prepared to meet and provide its US suitor with some due diligence and reveal details on its pension deficit, current trading and contracts. However, Premier’s board made it clear it expected McCormick to come in with a fourth, higher proposal after the discussions.

Yesterday morning, McCormick announced its exit. “McCormick has, after careful consideration, concluded that it would not be able to propose a price that would be recommended by the board of Premier Foods while also delivering appropriate returns for McCormick shareholders,” the Schwartz and Lawry’s owner said. just-food understands the third proposed bid of 65p was the last that was even discussed between McCormick and Premier.

Premier’s shares promptly tumbled. Having hit as high as 61.19p on 30 March, at the close of trading on Tuesday, the stock was at 57.12p. In the minutes after McCormick’s announcement yesterday, Premier’s shares sunk to 41.3p, dropping as low as 39.3p before ending the day at 41.9p – way below McCormick’s third – and as it turned out, final – proposed offer of 65p a share.

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It was not into the late afternoon UK time that we heard a reaction from within Premier’s shareholder roster. US hedge fund Paulson & Co., one of the investors that had criticised Premier earlier in the process, said it was “extremely disappointing that the board could not recommend an offer at a 106% premium to the pre-announcement price”.

John Baillie, a director at Mole Valley Asset Management, holding less than 1% of Premier’s shares, told The Financial Times: “The management has played its hand badly from start to finish. The pressure is on them to show they were right to play hardball – and to deliver.”

In Premier’s statement to the stock exchange yesterday morning, reacting to McCormick walking away from the table, the company said its board “believes that the foundations have been laid for significant growth and shareholder value creation”.

The group added: “Premier Foods has a valuable portfolio of market leading brands, extensive distribution across key retail channels, a well-invested manufacturing base and strong operational cash flows. Additionally, the company plans to accelerate its growth by executing its recently announced new strategic initiatives to leverage the company’s existing capabilities, infrastructure and brand equity so as to expand into new formats, channels and markets.”

On 23 March, the day Premier made McCormick’s interest public, the Sharwood’s sauces maker set out “new strategic initatives” it said would “accelerate [the] growth trajectory” of the business. The moves include “building on” the “successful trial” of Mr Kipling and Cadbury cake lines, taking grocery brands into chilled aisles and growing its business outside the UK through its cake brands. Premier upped its forecast for medium-term sales growth from 1-2% a year to 2-4%.

It is not uncommon for companies keen to stay independent to tout their growth prospects as a stand-alone entity but Premier’s management will now be under scrutiny. While CEO Gavin Darby and his colleagues have enjoyed some early success in revitalising parts of the Premier portfolio, they have yet to see steady progress. In November, Premier reported a rise in sales of its branded products for the first six months of its financial year, the first time revenue from its brands had risen for two years. By January, Premier was posting a nine-month fall in branded sales, pointing the finger at the milder weather seen in the last weeks of calendar 2015.

Premier has seen the fruits of investment in brands like Mr Kipling but the burden of paying down its debt pile and the commitments to the pension deficit mean the company has only been able to fund investment in one or two brands at a time, while, of course, pricing in the UK grocery market remains broadly in the doldrums.

However, some analysts covering the Premier stock believe the company could see the benefits of its new “strategic initiatives”. Nicola Mallard, an analyst at Investec, says: “We haven’t seen them deliver growth yet, not consistently but there’s enough evidence there to give them the benefit of the doubt in terms of what they’re doing with revitalising the brands, that’s starting to have an impact on Bisto and Oxo and the cakes where they’ve done it. If you extrapolate that across the whole portfolio, they’ve got a decent chance of getting at least into 1-2% growth and, clearly with what they’re talking about in their strategic initiatives that they’ve revealed, 2-4% in the medium term.”

Declan Morrissey, an analyst at Davy Stockbrokers, says “many of these growth initiatives are achievable”, pointing the plans for Premier’s sweet treats division but concedes others, including the company’s international plans, are “more ambitious”.

However, Morrissey adds: “If you look at the share price, that’s telling you people probably buy into some of the growth initiatives and are probably pricing in top-line growth of certainly at the lower end of that 2-4% range.”

There is, of course, the prospective partnership with Nissin to come into play. The “co-operation agreement” in areas including distribution and innovation was only set to go live if Premier stayed an independent entity. When Premier first outlined the at that stage potential deal with Nissin on 23 March, it said the companies could use Nissin products and formats to develop lines to market under the Batchelors brand in the UK. The company said it may be able to benefit from Nissin’s “international scale” to grow Premier’s brands in overseas markets. However, Batchelors is a brand under pressure in the UK, while the jury is out on whether Asian consumers would be interested in cakes, gravy and custard.

Morrissey is sceptical. “It’s a stretch there’s going to be big upside and massive synergies from this co-operation agreement,” he says. The Davy Stockbrokers analyst also wonders whether Nissin’s stake-building will stop at 19.9%. “That is the big unknown in this whole series of events. What was the rationale for Nissin buying the stake? They could have had a co-operation agreement without the stake. Are they happy to sit at sub-20%? Or are they going to increase their stake? They have plenty of cash if they want to do so. I think they probably have the equivalent of about a half a billion in sterling net cash. There’s no constraint on them financially.”

Looking back on the whole episode, one possible conclusion to draw is Premier could be a takeover target for another company. McCormick may have walked away but the US group at least showed there could be interest in a business that some believe, with its presence in mature, centre-store categories in a fiercely competitiive market, with its debt pile and with its pension deficit would not be worth buying. Some in the City, however, believe the market under-values Premier and the company could be of interest to other suitors despite the fact its debt and pension commitments can, as an independent company, limit investment in its brands.

“I suppose this was a bit of wake-up call that anybody wanted to buy it. The fact it’s been trading at such a low value was on the assumption that no-one would want to buy it because of the balance sheet issues. The fact McCormick came along and offered money, Nissin presumably might’ve stepped up to the plate – we don’t know what would’ve happened if McCormick would’ve put a formal offer on the table, whether Nissin would’ve come in and offered something instead. It’s proved that it’s not an insurmountable problem,” Mallard says.

At Davy, Morrissey says he would not be surprised if another suitor emerged in the future. He insists a change of control can mean a business is “in a much stronger negotiating position” on issues like debt and pensions. “If you have an A credit rating, you can refinance that debt at a much lower rate and you can probably renegotiate the recovery schedule with the trustees and all of a sudden you’re a totally different picture,” Morrissey says.

“No-one would have predicted this three months ago. This is an industry where assets are scarce and M&A has been done at much higher multiples – I know for higher-quality companies – but now you’re almost at the stage where there’s still a lot of capital chasing scarce assets. People are beginning to look at businesses they might not have considered before and wouldn’t have been considered investible. They’re thinking about ways around that and maybe not so focused on balance sheet and more focused on the brands and trying to leverage strong existing market positions.”

However, with Nissin holding a chunk of Premier and set to have a seat on its board, how likely is it another company could be interested in the UK group, at least in the short term?