In the first of a two-part interview, Greencore CEO Patrick Coveney talks to Dean Best about the private-label manufacturer’s decision to quit the US and focus on the UK market.
In more than a decade at the helm of Greencore, Patrick Coveney has reshaped and grown the Ireland-based manufacturer into a major player in private label.
Promoted from CFO to CEO in 2007, Coveney has, through organic growth and M&A, created a significant supplier of own-label products ranging from sandwiches and sushi to soups and ready meals.
The path has not always been smooth – Boparan Holdings derailing Greencore’s move to merge with UK manufacturer Northern Foods in 2011 stands out – but Coveney presides over a business supplying the UK’s major grocers with a range of products and with a sizeable presence in buoyant food-to-go categories.
Until this summer, Coveney had also spent the best part of a decade building Greencore into a notable player in the US, supplying retailers, foodservice operators and – through the at the time eye-catching 2016 acquisition of Peacock Foods – acting as a co-packer for some branded manufacturers.
However, in October, Greencore announced it had struck a deal to sell its US operations and would quit the market.
Greencore had had its issues in the US in recent quarters and there had been some investor concern about the performance of its business there. In March, Greencore issued a group profit warning, with its US operations as the central factor. The London-listed group lost nearly a third of its market value on the day, its largest ever one-day fall.
Nevertheless, alongside that profit warning, Greencore set out a series of measures to try to improve the performance of its US business, meaning its decision to sell its US business a few months later did take some by surprise.
A month on from announcing the sale of Greencore’s US business, Coveney, sitting down with just-food in London, says the company had no intention of quitting the market.
“No matter what way I look at it, we got completely smashed in March when we had the unanticipated profit warning but then we had a hard but pretty quick look as to whether we should change our strategy [and] come out of the US. We concluded no. We made a whole series of organisational decisions in the US and the UK consistent with running a two-country business,” Coveney says. “Then, in mid-to-late August, we got what I can only describe as a unique approach.”
US contract manufacturer Hearthside Food Solutions, which itself got new owners earlier this year when private-equity firm Charlesbank Capital Partners and investment manager Partners Group bought the business, tabled an offer Coveney felt Greencore’s board had to accept.
“You had the only real strategic buyer, very keen [and] seeing very significant levels of synergies attached to the combination. It so happens the principal equity owner of that buyer [Charlesbank Capital Partners] was the previous owner of Peacock Foods and therefore had a high level of existing knowledge and understanding of the business. We weren’t looking to sell but there was a price at which we felt we would have to sell,” Coveney insists.
Hearthside Food Solutions and its owners had a US$1.07bn offer for Greencore’s US operations accepted by the Greencore board.
“That’s what they put on the table and, although undoubtedly it is a change versus the strategy that we were pursuing, we felt it was a change that we should embrace in the interest of the shareholders,” Coveney says. “The root by which this opportunity came was through me, through my relationships with Hearthside and Charlesbank. It was an offer that was shaped by me, taken to our board – cognisant of the issues of change of direction and emotional change – and it was still with a very strong recommendation from me that at this price we ought to engage.”
That recommendation must, however, have come with at least a tinge of disappointment for Coveney after spending the bulk of his tenure putting together the US business, even amid the challenges of knocking the business into shape along the way.
“I think to be the leader of a business – particularly in a public company, you have to undoubtedly have the kind of financial discipline and focus on value creation for shareholders – but frankly you also have to have a passion and enthusiasm for what you do. I personally really like the US market, loved the kind of entrepreneurial spirit with which we were trying to build out the business there over the last ten years,” Coveney reflects.
“With a better resourced and more focused business, we should be able to capitalise on changes we see in the UK market more aggressively than we might otherwise have been able to”
“People from March on would almost commiserate with me on the trauma of the profit warning and this incredible imposition of having to spend a lot of time in America, working with and running our business. Now, I was appreciative of the people being empathetic about the fact we got smashed up a bit with the profit warning but spending more time with our US team, recreating the team, resetting the network, resetting the strategy, deepening our relationship with customers, that’s fantastic stuff. That’s what we do, that’s what I’m paid to do. That really wasn’t any imposition at all. And, of course, I miss that, you know? But the reason companies should have strong independent boards is to help CEOs and business teams navigate through those kinds of discussions.”
just-food is meeting Coveney the day after Greencore held a shareholders’ meeting in Dublin to vote on the sale of the US business to Hearthside Food Solutions. The transaction was voted through but Greencore has faced criticism from some investors about the way the proceeds from the sale will reach shareholders. Greencore wants to pay out the bulk of the proceeds as a special dividend but this will incur an income tax liability for some shareholders.
Coveney acknowledges some investors were unhappy with the way returns were to be paid out but insists Greencore’s shareholders backed the move to sell to Hearthside Food Solutions at $1.07bn.
“I have not succeeded in finding any shareholder who wasn’t supportive of the decision to sell at that price [but] you then have a series of other challenges. Some shareholders don’t want any money back at all. They’d like us to keep all the money and invest it to grow the business. Some would like the option to take some money back but they don’t like the mechanic of the special dividend. Some do like the mechanic of the special dividend,” Coveney says. “We’re really clear that the decision to sell the US business has strong shareholder support. We’re also noting that it has created a level of disruption and quite a lot of different opinion around what to do with the money. That’s what we’re working through at the moment.”
A report in The Irish Times after the shareholders’ meeting said Greencore had faced criticism at the event that the decision to use a special dividend to distribute the proceeds from the US disposal suggested the company is lacking a strategy.
“Individual shareholders will say what they say,” Coveney says when just-food puts the report to him. “The overwhelming view of shareholders is this is a good transaction to do, 97% of them voted for it, there was no arm-twisting on that. Undoubtedly, quite a lot of shareholders are irritated about the mechanism of capital return, in particular retail shareholders for whom they have to treat it as income. In Ireland, that’s an up to 53% tax rate. Some of the comments I think need to be seen through that legitimate frustration.
“For people saying ‘Is this a change of strategy?’ Well, self-evidently it is. I think it would be completely incorrect for us to suddenly, in the course of four, five weeks, magic up an entirely new UK strategy because that’s not the right way to do it. The substance of how we think about the path for the business forward here is we have always had a great business in the UK. We think the UK market is going into a period where there’s going to be a lot of change and that, with a better resourced and more focused business, we should be able to capitalise on those changes more aggressively than we might otherwise have been able to do.”
Announcing the sale of the US business in October, Greencore touted its “industry-leading position” in the UK, which, it said, generates “attractive growth and returns”. There are, the company told investors, “significant opportunities in a dynamic UK marketplace”.
Greencore pointed to how the UK’s food-to-go category, where the company is a notable player (accounting for around 60% of the country’s sales of pre-packed sandwiches, for example), has been growing at almost three times the rate of the nation’s overall food sector. And Coveney expects food-to-go to continue to grow at around twice the pace of the market as a whole.
“To some people, [the US exit] will feel like a more constrained vision for the company than a global vision of US, UK and other stuff in time,” Coveney says. “I think the proof of this will just take a bit of time to work through. We certainly internally have a view that we have very exciting things that we can do in the UK and, as that unfolds, some people will think that’s exciting and some won’t.
“But the business will be more focused. There’s no point pretending otherwise. It’s not like we have a strategy that’s saying ‘We’re out of America, let’s look at going into Mexico or Italy.’ That’s not it. It’s how do we create value in the UK.”
Click here for part two of just-food’s interview with Coveney, in which he outlines where he sees opportunities for Greencore in the UK, as well as the challenges facing the business and the industry.