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January 27, 2014

UK: Premier Foods enters bread JV with Gores

Premier Foods will establish its bread unit as a stand-alone joint venture, with US private equity firm Gores Group taking a majority stake in the business.

Premier Foods will establish its bread unit as a stand-alone joint venture, with US private equity firm Gores Group taking a majority stake in the business.

Gores will pay GBP30m (US$49.6m) for 51% in the new company, Hovis Ltd. Of this, GBP15m will be deferred and is dependent on Hovis’ future performance. 

The deal values the bread business at an enterprise value of GBP87.5m Premier said, representing around 4x EBITDA generated in 2013. 

According to Premier, the agreement will allow the newly-formed entity to increase investment behind its key bread brand, Hovis. The joint venture partners have agreed to invest GBP45m in Hovis, in a bid to both improve efficiency and build brand equity. Gores and Premier plan to invest around GBP200m in the business over the next five years, the company said.

Premier had been seeking a joint venture partner for its ailing bread business since last year, because it lacks the funds needed to invest in the unit. Premier is a highly leveraged company, with net debt of around GBP890m and a pension deficit totalling GBP394.7m.

Premier said today (27 January) that it is in “constructive discussions” with its pension trustees in relation to the 2013 actuarial valuation of the pension schemes and associated recovery plan. The group added that it is reviewing a “full range” of options regarding its future capital structure.

Analysts have repeatedly suggested that the firm could look to raise GBP300-400m through a potential rights issue.

“We understand that the company is making progress with the pension trustees but note that this transaction places further pressure on the cash generation of its grocery business, as any cash generation from the bread business is unlikely to ever make it back to Premier. Accordingly if Premier wish to ‘normalise’ its capital structure a combination of debt refinancing and a rights issue are likely to be required,” Panmure Gordon analyst Damian McNeela wrote in a note to investors. 

The transaction will provide Premier with a cash injection of GBP28m, excluding fees. The company plans to invest this in its core grocery business. Specifically, Premier said that it intends to improve capacity in the cake business, including the investment of approximately GBP20m in a new snack pack cake slice line at the company’s manufacturing site in Carlton, Barnsley.

The group, whose stable of brands includes Mr Kipling and Bisto, revealed that its full-year trading profit is expected to be “in line” with expectations, while adjusted PBT is expected to be ahead of expectations as a result of “slightly lower” interest charges.

Grocery power brand sales were up 2% in the year to 31 December, despite a 1% drop in the fourth-quarter due to the “tough consumer environment”. This meant that power brand sales – which Premier has previously identified as its key strategic growth driver – rose just 0.3% in the second-half of the year.

Premier Foods shares dipped in early trade today, falling 1.57% at 10.17 GMT. 

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