Ranjit Singh Boparan’s swoop on Northern Foods has thrown the Essenta merger into disarray. Where now for Greencore, asks Hannah Stodell

After weeks of tongue-wagging, Ranjit Singh Boparan silenced the City with a firm offer for Northern Foods last Friday night, trumping Greencore's "merger of equals" with a £342m cash bid.

The boss of 2 Sisters cut it fine, negotiating a two-hour extension from the Takeover Panel, but with an offer effectively valuing the Northern shares at 70p (the guarantee of a 3p final dividend having been withdrawn), Boparan is now in the driving seat, with the Northern Foods board recommending the deal to shareholders.

Boparan now has until 19 February to post offer documents to shareholders. And while Greencore has hinted it will be back with improved terms, it will have its work cut out to match Boparan's offer: because the proposed Essenta deal is currently an all-share deal, Boparan's offer stands at a 42% premium based on Greencore's current 49p share price. And it offers Northern shareholders a 66% price premium to Northern's 42p share price prior to the tie-up announcement tabled last November.

Sweetening the offer has been made harder by Boparan hoovering up more shares in Northern, taking his stake to 11.4%.

Dilutive rights issue
But now cash is on the table, says one Northern shareholder, the £40m in synergy potential is much less appealing to shareholders.

Evolution Securities analyst Warren Ackerman believes that a dilutive rights issue may be required. "Greencore might consider going as far as it can with cash and then asking existing shareholders to stump up the rest in some sort of rights issue, but financing on this scale could prove challenging given its current debt position."

Another issue for Greencore is Northern's pension. Under its original merger terms, Greencore pledged £15m annually to plug Northern's £142m pension deficit while Boparan's agreement with pension trustees is thought to be at least £20m.

Northern's pension scheme has a triennial valuation starting in March, which could see this hole widen to more than £200m, according to a source.

The merger talk may even have put Greencore itself in the shop window. "In seeking to come together with a business like Northern, it has indicated its own vulnerability," says one mergers & acquisitions source.

But another source close to Greencore argues that having to go it alone wouldn't be the end of the world. After the troubled takeover of Hazelwood in the late 1990s, CEO Patrick Coveney will be wary of overpaying for Northern, he says, "and may turn his attention to smaller UK acquisitions and the US where it is already building a strong position".

Coveney will also be encouraged by "positive noises" from Northern customers such as Tesco and Marks & Spencer, which "would have been key to the due diligence work he conducted in drafting the Essenta merger".

It's not cut and dried for Boparan either. Even if he is triumphant, significant challenges lie ahead both in terms of paying down the debt used to finance the deal a figure unconfirmed by Boparan but which analysts suggest may exceed £300m and implementing an effective management takeover.

"Retailers would be nervous about supplier consolidation under the Essenta offer, but equally, they are a demanding bunch, in terms of standards, and would not welcome hiccups.

"And he'll also have to look at disposals. Fox's and Matthew Walker are obvious targets for trade and private equity buyers, but it may be tough to get the right price for Goodfella's in the current climate."

The race is now on for Coveney to come up with the goods. The will to win is there, says Ackerman, but he admits: "I think it is 70:30 against Greencore coming back with an offer that will trump what's already on the table."

Read more
Boparan grows Northern stake to heap pressure on Greencore (25 January 2011)
Greencore ponders cash sweetener after Northern backs Boparan bid (24 January 2011)