Suitors are said to be circling one of Premier Foods’ key brands as it struggles to cut its debt mountain. But who will want Quorn, asks Simon Mowbray

It's 6 June 2005 and Premier Foods has just bought Marlow Foods, the owner of meat substitute Quorn, from Montagu Private Equity for £172m. The sun is metaphorically, at least shining and Premier's non-executive chairman David Kappler is doing and saying all the right things.

The share price rises 6.93% in one day and, just five months later, Premier strengthens its stranglehold on the fast-expanding 'meat replacement' category when it pays £27m for Cauldron Foods as sales of Quorn reach the £100m mark in the UK for the first time.

But that's just the warm-up act. By the start of December, Premier has agreed to buy Hovis, Bisto, Sharwood's and Mr Kipling owner RHM for £1.2bn and Premier's share price leaps above the 200p mark, the start of a magic 18 months during which even the 300p a share point looms teasingly close. Premier cements its stature as the UK's biggest food and drink supplier, an accolade it can still claim today with annual sales ­exceeding £2bn.

Then comes the crash, caused by crippling debts, onerous pension liabilities and soaring wheat prices that expose poor due diligence. The onset of the recession and the resulting price war comes at just the wrong time. Long-term interest deals on loans already secured today saddle the business with estimated annual interest payments of around £150m, 10% of its £1.6bn debt burden.

Last Friday, Premier's share price plumbed new depths, down to 16p, leaving many City tipsters, who had touted Premier Foods as a good buy at 33p at the start of the year, with egg on their faces.

As a result, Premier's subsequent admission it has received ­approaches to part with Quorn along with Cauldron Foods for an estimated £250m, as it starts a concerted effort to reduce its debt mountain, will have come as little surprise to many commentators.

Opinion among key analysts is divided, although patience and it has to be said interest is wearing thin in some quarters.

Certainly, the case for shareholders to stick patiently with Premier's long-term recovery plan will not have been helped by Shore Capital's influential food industry analysts Clive Black and Darren Shirley who, in a trading note issued following Premier's confirmation that it was in talks with suitors for its meat-free business, remained unequivocal in their commitment to recommending that interested parties should sell their shares at any price.

Pension liabilities of £3bn

More worryingly for Premier will be the tone of the duo's written briefing: "Quorn is, or perhaps was, a jewel in Premier's crown and is certainly a business that the group 'paid up' for alongside Cauldron Foods in what were at the time perceived as strong growth areas of the UK food market. However decelerating market growth has taken the shine off Quorn to our minds."

The pair also cited Premier's "massive pension liabilities", estimated at about £3bn, as they continued to "harbour doubts as to whether or not Premier's equity value is positive", and raised the possibility of "further senior management change".

Black also claims that a sale of Premier's meat-free business may not be a given: "The performance of Quorn has been poor, and one of the victims of the recession has been the vegetarian prepared food category, so it is not wholly clear to us who would want it."

Maybe, but it should be remembered that Quorn is still an estimated £120m success at the till and owns by far the lion's share of the £200m-plus meat replacement market, despite Premier revealing a 1.6% dip in six-month sales to 26 June. Sales of Cauldron remain much smaller, however estimated at around £10m while a recent revamp, including new packaging, has been aimed at turning around a slump that, according to IRI, saw a downturn in sales last year of 18.5% by value and 21% by volume.


Premier appears unusually keen to keep up the momentum of speculation about suitors for its meat-free business. Its statement this week confirming interest in Quorn and co read: "The board remains open-minded about disposals, provided they deliver shareholder value and accelerate the reduction of average net debt. As part of this, the group confirms it has received approaches that may or may not lead to a sale of its meat-free business, including Quorn."

As to the identities of the companies currently in the frame for Quorn and Cauldron, opinion is divided. Names mooted in the financial pages have included the usual suspects of Unilever, Nestlé and Danone. But the smart money, insists one analyst, should be on Heinz. "Quorn would be a great fit in its portfolio, as it already has a thriving ready meal business in the UK, although a company like Kerry Foods, which already has an ingredients and ready meals business, could be a dark horse," predicts Alex Sloane, a food manufacturing analyst at Evolution Securities.

Northern Foods, another ready meals specialist that may not mind a bigger bite at the meat-free market, could be another big name to enter the fray, and this week it reported a stout performance in its chilled operations. However, it too is laden with debt, and recently agreed to sell Dalepak Frozen Foods including the Grassington vegetarian foods brand to the Irish Food Processors Group.

Private equity buyers particularly those with a history in food and drink such as Weetabix buyer Lion Capital, Birds Eye conqueror Permira and United Biscuits owners Blackstone and PAI Partners could also be circling, says Sloane. What's for certain, concedes Black, is that someone is. "But I would be surprised if one of the larger companies takes out Quorn," he adds.

Will a sale of just one of its core assets really make that much difference? "The business needs cash and right now it doesn't have many options," says Simon Peacock, a principal at Catalyst Corporate Finance. "It has to start somewhere."

Suitors for quorn
Alex Sloane, food manufacturing analyst at Evolution Securities, gives The Grocer his lowdown on the potential bidders for Premier's meat-free business.

Danone: "I think Quorn would be a very strange acquisition for Danone. They may be in chilled dairy, but chilled ready meals are something completely different."

: "They obviously like health and wellness, so Quorn would be a good fit on that front. But I still wouldn't put them as a front runner."

Unilever: "I just don't see it, but never say never."

Heinz: "This is my top tip. Quorn would be a great fit for Heinz. They are already in ready meals in the UK."

Kerry Foods: "This could be a dark horse as it already has an ingredients and ready meals business. One to watch."

Northern Foods: ­"A possible, although I don't think they would have the balance sheet to do it. They have their own debt worries."

Private equity: "Always a good bet and there have been notable acquisitions in recent years. Lion Capital, Blackstone and Permira all have good experience in food and drink."