Mergers and acquisitions on the menu for food groups

by John Hughman - 07/10/2010

"After Kraft's audacious swoop for Cadbury last year, merger activity in the food industry has been off the menu for a while"

But activity in the sector has been rekindled from an unlikely quarter: China Inc. Last week it emerged that the country's Bright Food Group - majority owned by the Shanghai government - is in exclusive talks to buy the UK's United Biscuits, and is prepared to pay £2bn plus £500m of debt for the private equity-owned maker of household favourites including McVities, Jacob's and Jaffa Cakes.

Given United Biscuits' ownership status, the prospect of another trophy asset sold out to foreign owners is unlikely to see a recurrence of the wave of jingoistic outpouring seen during the Kraft/Cadbury takeover. But it does reaffirm the value leading brands can attract - Bright Food is prepared to pay a premium because believes it can sell historic British brands to its customers. The Chinese are prodigious tea drinkers - so perhaps some Rich Tea biscuits to dunk isn't such a mad idea after all.

Of course, the group's history could have charted a very different course had Premier Foods and not Blackstone bought the business back in 2006 - it pulled out of the running leaving the door open for the private equity group to seal its £1.6bn purchase. Since then, Premier's aggressive strategy of acquiring market leading brands such as Branston, Bisto and Mr Kipling has seen the value of its equity subsumed by debt. Despite efforts to revitalise its brands, such as its £15m relaunch of Hovis, which it bought for £1.2bn in 2007, the trading recovery simply cannot come fast enough to make any significant inroads into its £1.5bn debt or £400m pensions liability.

Analysts' long-held suspicion that this could lead to forced disposals now appears to be coming to pass after Premier confirmed press speculation that it was in talks to sell its meat-free division, which includes Quorn and Cauldron. Its shares jumped 10 per cent on the news, but investors are growing impatient over the slow pace of debt reduction and the dearth of disposals, and selling meat-free for an estimated £200m-£250m isn't enough to solve Premier's problems.

That could mean further asset sales, although the company has ruled out selling brands that would materially dilute earnings. As Clive Black at Shore Capital points out, that raises the possibility of a further deeply discounted equity issue following the £400m raised in March 2009. "We continue to harbour doubts as to whether Premier's equity value is positive," he said. Given the debt pile, a sale of the entire group looks equally unlikely - unless, of course, somewhere in China consumers are developing a taste for Branston pickle.

More Details: http://www.investorschronicle.co.uk/Companies/ByEvent/MergersAndAcquisitions/default/article/20101006/10814da8-d148-11df-9840-00144f2af8e8/Mergers-and-acquisitions-on-the-menu-for-food-groups.jsp