Premier is looking at "investment options" for its struggling bread business

Premier is looking at "investment options" for its struggling bread business

Premier Foods Plc has engaged the services of a financial advisory firm as it looks at "developing investment options" for its struggling bread business, which could potentially include co-investment from a partner.

"The company confirms it has appointed Ondra Partners to assist in developing investment options for the bread business, which include co-investment by a partner," Premier said in a statement.

Ondra Partners is an independent financial advisory firm that specialises in M&A and restructuring.

The highly leveraged Hovis maker has embarked on a period of restructuring as it looks to address its balance sheet issues. The company has disposed of a swathe of non-core assets, including Quorn and Branston, in a bid to pay down the group's high debt levels as part agreements to restructure the firm's loan covenants.

Last year, it was rumoured the company had appointed Goldman Sachs to assess the potential sale of its entire bread unit. However, the focus has since moved to reducing costs and improving efficiency while also driving sales of its "power brands".

As part of its cost reduction initiative, the company has cut SKUs and consolidated its supplier base from around 3,000 suppliers to 1,500. The company is targeting cost-savings of GBP30m (US$48.2m).

Premier's bread business has proven particularly problematic, with sales coming under increasing pressure in a relatively promotional UK bread market. In its most recent quarterly update, Premier said its bread unit saw sales dip 1.5%, again affected by the hot weather.

The company has been restructuring the division in a bid to boost profitability and last year Premier said it would cut 900 jobs, close over 100 distribution routes and revamp its logistics operation. Premier has closed bakeries in Greenford and Birmingham as well as its Glasgow mill this year.

The company is now seeking fresh investment to further propel improvements in bread.

According to a Sky News report, the company is in talks with a number of private equity funds as it attempts to secure a capital injection. Options are understood to include a potential spin-off of bread, which would then be co-owned by Premier and an investor.

"There can be no certainty that a transaction will follow at any point in the future, but the company will provide updates as appropriate," Premier cautioned.

Premier's share price jumped 4.43% at 13.15 (GMT) on the news.

However, Panmure Gordon analyst Graham Jones remained unimpressed. "We struggle to see how this would resolve Premier's balance sheet issues and still believe the optimal solution is a significant rights issue to raise GBP250-GBP300m," he wrote in a note to investors.

Panmure Gordon estimates Premier's net debt at the year-end will stand at GBP858m, or 4.8x EBITDA, excluding the pension deficit.

"Even if they sell half the business and put the business into a 50:50 JV to raise GBP125m, we still believe a rights issue will be needed. Equally we would think the pension fund trustees could ask for a cut of the proceeds given the deal would reduce the cash generative base of the group further."