Premier Foods has completed a long-awaited strategic review which will involve the amalgamation of the UK food group’s pension funds, removing a financial impediment that has dogged the Mr. Kipling cakes maker for some time.

The Batchelors soups owner had been expected in some quarters to announce a piecemeal sell-off of parts of the business or even a sale of the whole company upon the conclusion of the review under a relatively new management team.

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However, the London-listed business  plans to instigate what it calls a “segregated merger” of all the group’s pension schemes, namely the Premier scheme, the RHM scheme and the Premier Grocery Products scheme. The former has been in deficit for a while, and stood around the GBP480m (US$597.7m) mark last year.

Premier said today (20 April) the transformation will take the form of a buyout of the other schemes by RHM, which will reduce the deficit elsewhere and free up cash. The buyout would be initiated by a “specialist insurance provider”, the company said. 

“This transformational agreement is a segregated merger of all the group’s pension schemes, which will place all the UK defined benefit schemes under one trust and is the result of extensive discussions with a number of key stakeholders,” Premier said in a filing with the London Stock Exchange. 

“The key benefit of this agreement is that once the RHM pension scheme executes a buyout, a surplus would then be able to be passed to the remaining schemes in deficit, and so would result in a vastly improved funding position of these schemes. As such, this agreement represents a much more secure future for the group’s pension scheme members and has the potential to significantly reduce future funding requirements for the group.”

As a result of the pensions merger, Premier said the net present value of deficit contributions “could” fall by around 45% from GBP300-320m to GBP175-185m. And the scheme expenses would save the company around GBP4m annually from fiscal 2020-21.

There is also the “potential for a significant reduction” in future pension deficit contributions from the current GBP38m annually. And from 2023-24 onward, Premier painted three scenarios for cutting its contribution: GBP8m lower at GBP30m per annum, GBP16m lower at GBP22m; and GBP21m lower at GBP17m.

Chairman Colin Day, the former executive at Reckitt Benckiser who joined Premier last summer, said: “The segregated merger of the company’s pensions schemes we are announcing today represents a ground-breaking agreement which is set to unlock benefits and value for all stakeholders in the company, leveraging the strength of the RHM scheme and substantially improving the position of the Premier Foods schemes. 

“With a buyout of the RHM scheme getting progressively closer, any resulting surplus would be transferred to the remaining schemes and therefore result in significantly reduced pension deficit cash contributions by the company in future years. 

“The group will continue to pursue its successful branded growth model strategy, opening up further opportunities to deliver value in due course.”

Day added the pensions merger is subject to agreeing “definitive legal documentation with the scheme trustees”, and if concluded, would be implemented by the end of June.

Meanwhile, Premier said it will present its full-year results to 28 March on 14 May but did also provide a trading update, noting how the company expects to report a profit at the “top-end” of market expectations. 

With the strategic review now complete, the business plans to “actively pursue its successful branded growth model strategy, building market leading brands through consumer-focused innovation and highly engaging advertising”, Premier said.

The Sharwood’s sauces owner added how it had seen increased demand from the coronavirus crisis, particularly in March during its fourth quarter when volumes rose “sharply”. And so the company expects fourth-quarter group sales to have risen 3.6% compared to a year earlier, while the UK market is seen up 7.3%.

All of its manufacturing facilities are operating at “maximum capacity” to fulfil orders as a result of Covid-19, it said.

Clive Black, a consumer-goods analyst at Shore Capital, described the merger as “great news” given the company’s pension liabilities had prevented the business from making inroads into cutting its debts.

That debt pile stood around the GBP470m mark in September last year. Alex Whitehouse, who was promoted to chief executive last year, had put in place a target to achieve a net debt-to-EBITDA ratio of three times by the end of last year, from 3.2 times in the previous 12 months. Premier said today metric was “comfortably lower” than the three target in March.

“Leverage from debt and pension responsibilities have been the drag on the Premier Foods equity rating for some years and this represents an immensely positive moment in the business’ troubled history,” Black said in a research note today.