Bakkavor must sweeten its offering for a successful float on the London Stock Exchange

Note: This article went to press on Thursday 9 Nov. Bakkavor announced it had resurrected its float plan on the morning of Friday 10 November - offering investors shares at 180p having previously been marketing the float at between 195p and 235p.

Bakkavor is expected to try to float the business again next year after pulling its London IPO at the 11th hour, with City sources warning it will need to sweeten its offering to generate sufficient investor interest.

The ready meals giant revealed float plans last month, expected to value it at £1bn-£1.5bn.

But the group pulled the plug on the listing last Friday, citing “volatility” in the IPO market despite “sufficient institutional demand” to cover the offer.

A number of dealmakers and analysts in the City were sceptical, pointing to record highs for the FTSE 100. “It is simply not the case that markets are too volatile to get an IPO away,” said one consumer goods analyst. “Bakkavor was pushing a valuation of 9x or 10x EBITDA of £145m and there was a loss in confidence in getting the levels they wanted.”

Underlying profits at Bakkavor increased 8.1% to £77.7m in the first half of 2017, but another industry source said investors were pessimistic on the growth story.

“The prepared food market is growing at 3%-5% per annum but you have some big players in that category so taking share is difficult,” the source added. “Investors had worries that despite strong growth at the business it may have peaked.”

There has also been a scarcity of food and beverage flotations in UK, with only Fever-Tree coming to the market in recent years. Suppliers such as Chaucer Foods and United Biscuits explored floats before selling to private buyers, and Noble Foods announced IPO ambitions this year but is yet to make a material move.

One City source noted some market participants were reluctant to become over-exposed to the food sector ahead of an expected float for the combined Fox’s Biscuits and Burton’s, which could come as early as January 2018.

“The UK stock market appears not to be particularly interested in the food sector,” they added.

Bakkavor would have to return to the IPO market next year as there are no obvious trade buyers to provide an exit for Baupost, which helped company founders Agust and Lydur Gudmundsson to retake control of the group in January 2016.

“Bakkavor and Baupost must be feeling very sore now,” a senior dealmaker said. “The question is how do they monetise? And Baupost will have known that before they made the decision to pull the IPO so demand must have been negligible or at extremely disappointing price levels.”

Another source added: “Bakkavor will come back to the market as it is the only way Baupost can hope to realise its investment. There is plenty of cash out there so should be enough demand for an IPO, but they may have to sweeten the deal and scale back valuation expectations.”