Why Merchant Gourmet deal is a ‘good fit’ for Premier Foods

Premier Foods took another step in its transformation journey last week as it unveiled the takeover of premium ready-to-eat grains and pulses brand Merchant Gourmet.

It marks the third deal struck by CEO Alex Whitehouse since he took charge of the once-troubled ambient food supplier in 2019, and signals a further shift into healthier categories for the Oxo, Bisto and Mr Kipling owner.

Premier is aiming for 50% of its SKUs to provide additional health or nutritional benefits by 2030 thanks to a reformulation drive. It has ambitions to double sales of “high nutritional standard” products in the same timeframe.

Merchant Gourmet’s health credentials make it a “good fit” for the group’s evolving portfolio, says Jefferies analyst Andrew Wade.

“[The deal carries] many of the same hallmarks as the previous successes with Fuel10K and The Spice Tailor – a strong brand in an attractive area of the market that has built good distribution, but has significant scope to be scaled up,” he adds. “We see Merchant Gourmet as being a good fit for the Premier Foods stable, it is complementary to the existing portfolio, has a presence in a number of on-trend healthy categories, and a clean ingredient list.”

Capital light and cash generative

Spayne Lindsay CEO Tom Lindsay, who advised Premier on the deal, agrees Merchant Gourmet is a “strong prospect”, having no in-house manufacturing to tie up capital and also being highly cash-generative.

Premier’s tried-and-tested strategy of targeting smaller, low-risk deals and ramping up growth by strengthening distribution, turning on the marketing tap and investing behind innovation has led to double-digit growth at the two previously acquired brands.

“When they looked at Merchant Gourmet, they felt there was an awful lot they could do to build on what’s already there, and they liked the team. There’s a lot of excitement across the board at Premier,” Lindsay adds.

Unlike previous deals, the Merchant Gourmet senior management team, led by MD Richard Peake, will continue to run the business. “What’s changing is our ability to do more of what we believe in and to do it even better,” he says.

And he credits Premier’s “strong track record in taking brands to their next stage of growth, all while keeping their unique character”.

He notes Premier has also made “huge strides” by growing the value of sales from healthier products by 36% over the past five years and launching or updating hundreds of SKUs.

“Health remains a key strategic priority for Premier, and we are excited to work with them on their journey to expand this even further,” Peake adds.

Read more on Premier Foods:

• Premier Foods snaps up Merchant Gourmet for £48m

• Premier Foods sales exceed £1bn thanks to ‘premiumisation’ trend

• Premier Foods grocery sales hit by heatwave as demand for gravy, stock and soup falls

• Premier Foods eyes M&A push as sales of brands pass £1bn

While it may be “strategically sensible”, RBC analyst James Edwardes Jones argues the £48m paid “seems high”, amounting to 1.7x prospective FY2026 revenues of £28m and a high-single-digit EBITDA multiple.

But Peel Hunt head of research Charles Hall reckons Merchant Gourmet fits the Premier playbook well and expects the brand to maintain its double-digit growth rate.

“Longer term, we see potential for the brand to go beyond £50m of sales,” he says.

Further deals in the pipeline

Further M&A may be on the horizon for Premier, with Lindsay noting it has “been looking to add on fast-growth businesses that fit their business model” since 2022.

Any historic difficulties – resulting from a problematic purchase of food giant RHM almost 20 years ago – are a thing of the past and the group now has “a very valid, credible M&A strategy”, he adds.

Clive Black, head of consumer research at Shore Capital, also notes Premier has “considerable firepower” thanks to a “very strong” balance sheet.

He is watching “with interest” to see where Premier looks next, contending that larger or even international deals “may yet be on the agenda”.

Analysis by investment bank Deutsche Numis suggests Premier has up to around £400m of potential dry powder at its disposal for further deals.

Black adds: “This deal is a healthy reminder of the high capability and revolutionised virtues of this undervalued British equity, a firm where Alex Whitehouse and others have quietly, but so effectively, positively adjusted the investment narrative.”