Blog: Dean BestScepticism over rumours linking Bimbo to Hovis

Dean Best | 11 September 2013

Premier Foods' shares were buoyed last week by talk Mexican bakery giant Grupo Bimbo could be interested in the UK firm's Hovis unit. But not everyone in the City thinks a move from Mexico could be in the offing.

Speculation over Premier's Hovis bakery business has swirled for a year, with reports last October the company had hired Goldman Sachs to talks to sound out potential buyers.

The Hovis business has struggled in recent years. Sales and profits fell in 2011 and 2012 amid intense competition in the UK bread sector. Last year, Premier lost a key contract to supply UK retailer The Co-operative Group with own-label bread to rival Associated British Foods.

In recent months, Premier has tried to boost the performance of the business with a series of cost-saving measures, including job cuts and factory closures.

Chatter about whether Premier could sell Hovis has tended to come with a qualification about which companies could by the business - anti-trust concerns would likely stymie any attempt by fellow UK bread suppliers Associated British Foods and Warburtons.

However, the Bimbo rumour did boost Premier's stock last week, pushing up shares already helped by signs the company was seeing improved results from its grocery brands, which include Sharwoods cooking sauces and Bisto gravy.

Premier's shares also received a further boost yesterday after Shore Capital, a long-time critic of the company's performance, moved to issue a 'buy' rating on the group's shares.

Nevertheless, analysts at Panmure Gordon this morning tried to cool investors' appetite for Premier - and said a move for Hovis from Bimbo was unlikely.

Panmure upped its price target on Premier's shares from 65p to 130p. Analyst Graham Jones said the stockbrokers were "more confident about the overall outlook" for the company.

However, he insisted: "We think the rally has gone too far, and a rating of 8.5x EV/EBITDA for 2013 is too rich for a company with still exceptionally high gearing. As such we retain our sell recommendation."

Jones said the outlook for Premier's debt pile - he forecast net debt of GBP827m in December 2014 and GBP801m in December 2015 - was "too high" and argued the company will look to refinance, including a rights issue, in the next 12 months.

Moreover, Jones sought to play down the talk linking Bimbo to Hovis - and suggested a sale may not be a wise move for Premier.

"We are sceptical about the rumours suggesting Grupo Bimbo will acquire Hovis, and in any case selling another large chunk of cash flow may not necessarily be the right move given that the pension liabilities tend to be retained by the group," he wrote.

It has been touted elsewhere in the City that a sale for GBP250m would bolster Premier's balance sheet. However, speaking to just-food, Jones added: "I think they would need to get more ... as that only implies 5x EBITDA – given Premier's net debt/EBIDTA is 4.8x it doesn't really do that much to deleverage the business –and it just means GBP50m less EBITDA to service the pension fund."


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