Premier Foods’ mammoth restructuring effort looks to be nearing the end after it spun off another non-core business.
The company will shift its powdered goods business, which includes Bird’s, Angel Delight and Marvel products, into a joint venture with Speciality Powders Holdings – named Knighton Foods.
The deal is similar in many respects to its spin-off of Hovis in January into a joint venture with Gores Group, in which Premier Foods retained a 49% stake – just as it will in Knighton Foods.
Where it differs is that Gores is a private equity firm and the deal was more driven by cash and additional management expertise. Conversely this transaction is more of a trade sale that puts the business under a specialist powdered goods manufacturer, which is contributing its own wholly owned business Phoenix Foods and Agglomeration Technology for its 51% stake.
The deal includes approximately £16m of Premier’s private label and business-to-business sales of powdered goods and the Brown & Polson brand of home baking ingredients will be licensed to the joint venture, with an option to buy for £2.75m.
Though Premier Foods did not disclose sales in its powdered division, it did reveal that the business moving to the joint venture made a trading loss of £0.7m during the 2013 calendar year and was EBITDA neutral.
Both parties have agreed not to sell their shares in the venture before 2018, but given Premier’s minority stake and the marginal contribution powdered goods make to bottom line the level of strategic importance it will place on the venture might be questioned.
Panmure Gordon analyst Graham Jones noted that the sale, as that is what the deal essentially constitutes, is a “clever deal” for the company.
He explained that roughly one-third of the Knighton facility’s sales make up the £16m of own label and B2B business that will be transferred to the joint venture, circa one-third of sales will be co-packed by the joint venture for Premier for at least 4.5 years (such as Bird’s and Angel Delight) and one-third will be transferred to Premier’s Ashford plant
“Premier has got rid of a problematic factory and some loss-making sales, while retaining all the branded sales from the facility. In that sense it’s quite a neat little deal for them,” Jones added.
Premier will take a restructuring cost of approximately £4m on the venture and a further £1m of capex will be required, but Panmure Gordon estimated the deal could facilitate cost savings of £5-8m per annum.
That is not an insignificant number when Premier has prioritised maximising value and efficiencies since CEO Gavin Darby took over last year.
Darby has looked to reduce complexity in the business – the company intends to halve its number of suppliers by the end of the year and today announced the completion of the consolidation of its distribution centres from three to two.
Following the completion in March of a capital restructuring, which included a new pensions framework agreement, a £353m rights issue, £500m high-yield bond and a £272m revolving credit facility, the company finally seems to be in a position where it can fully concentrate on its core business.
Group corporate affairs director Richard Johnson commented: “Now the financial restructuring and decisions over Hovis are behind us we are absolutely focussed on managing the day-to-day business. We have exciting plans coming up, including more marketing and innovation, and we are committed to delivering those plans during the rest of the year”.
That renewed focus on its power brands (Ambrosia, Bisto, Bachelors, Loyd Grossman, Mr Kipling, Oxo and Sharwood’s) is taking time to translate into an upwards sales trajectory – illustrated by this morning’s announcement that these brands would see sales fall in the second quarter.
Premier Foods shares fell over 9% (5.25p) to 52.18p today on the downbeat sales news after having risen back to around 62p earlier this month.
The company blamed “subdued grocery markets” for the dip, but Premier should be in a decent position to ride that downturn as it has strong, historic brands that are not part of the main battleground of the supermarket price war.
Premier said brand innovation was primarily loaded in the second half of the year, but as Jones argues, the company really needs to be innovating throughout the whole year.
Panmure Gordon, Credit Suisse, Goldman Sachs, Jefferies and Shore Capital all have buy or outperform ratings on the stock given the discount it trades at due to its recent turbulent history. The company releases its first-half results next month and the market will soon start running out of patience if these ‘power brands’ fail to deliver in the near future.