Premier Foods may have to settle for a joint venture (jv) partner for its troubled Hovis bread business if it fails to secure an outright buyer, as it tries to reduce its mountain of debt and avoid the prospects breaching banking covenants.
According to informed sources, three businesses are left in the frame to buy the business from about nine or 10 that had expressed interest in investing or completely buying the bread business. Premier has appointed Ondra Partners to handle the sale or partnership investment.
The three remaining interested parties are believed to be private equity firms PAI Partners, which owns United Biscuits and acquired R&R Ice Cream earlier this year, Sun Capital Partners and The Gores Group. Contrary to earlier reports, HIG Europe is not in the running, one source said. However, Shore Capital analyst Clive Black described all these names as “media speculation”.
Price of around £100M
Premier is known to be seeking a sale price of around £100M but one source doubted that it could realise anything above £50M.
“Premier is once again right up against it,” said one source. “It needs to refinance early in the New Year and the bread business is a massive millstone because it is generating no cash. Premier Foods is competitively disadvantaged against Warburtons and also ABF [Associated British Foods, which owns Allied Bakeries].”
“What is of paramount importance for Premier is that it refinances the business and it raises some equity,” said another source. “It is much easier to raise equity without having bread there. And they will probably have to swallow a low price to get to that situation.”
Shore Capital’s Black said: “Premier Foods wants to try to improve the mix of its business and focus on its higher margin brands … all options are open.” Some sources put its bread margins at 4.5% compared with around nearly 20% for its grocery business.
A jv with external investment from a private equity firm might provide an interim solution to an eventual full sale. Under this option, the bread business could be taken off Premier’s profit and loss account by placing it into a new jv company, said one source.
However, Julian Wild, a partner with Law firm Rollits, said: “Premier is much more interested in a straight sale if it can pull it off.”
But that will depend on the company getting the price it needs to reduce its debt exposure.
“The important number that everyone focuses on – whether or not it is going to breach its debt covenants – is the ratio of the net debt to EBITDA [earnings before interest, tax depreciation and amortisation],” said one source. “So you’ve got to get over a certain multiple for [a sale] to make sense from a leverage point of view.” Unless Premier gets sufficient money for Hovis, its leverage could actually go up for the remaining business.
There has been widespread belief among City commentators that Premier will make a rights issue to raise funds in the first half of 2014. “Premier Foods is looking at re-engineering its broader balance sheet and reducing its debt, probably through an equity issue and maybe also through a corporate bond, to bring greater clarity and less volatility to the debt profile,” Black told FoodManufacture.co.uk.
Premier tried to sell its bread business earlier in this year, but failed to achieve a price it needed. If a deal fails to emerge this time round, there will be increasing pressure on Premier’s share price, said another commentator. It desperately needs to reduce its huge levels of debt, which amount to around £1bn and include a very large pension fund deficit.
“There isn’t a fantastic list of bidders in this process right now,” said a source. “Premier is hoping to announce a deal before Christmas. I don’t think that is what will happen.”