Premier Foods’ new chief faces full inbox

by Louise Lucas - 18/08/2011

"Mike Clarke takes up the reins at Premier Foods on Tuesday with a full inbox."

The UK manufacturer of Mr Kipling’s cakes and Branston pickles has seen profits slump; it has scrapped with two of its biggest customers; it sits on nearly £1bn ($1.6bn) of debt and has over £3bn in pension liabilities. Shares, meantime, are close to all time lows.
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Much is thus riding on Mr Clarke, who previously headed Kraft’s European operations and played a role in integrating UK-based Cadbury following its acquisition by the US foods group last year. But, warn analysts, there is “no magic wand”.

“The fact is Premier is a very challenged company and it’s not going to be an easy job for him to structurally improve that business,” said Clive Black, analyst at Shore Capital and an early (prescient) bear on the stock.

Those challenges were thrown into sharp relief in the first half. Premier pushed through price rises and shopkeepers balked. Tesco, the UK’s biggest retailer, refused to stock several lines for a couple of months and Marks and Spencer pulled a “significant” pie contract. Consequently, Premier reported a 33 per cent plunge in operating profit on continuing operations to £67m.

While Premier shrugs off any fallout from of the spats – “my sales force have hides like rhinoceroses; this is normal tactical knockabout,” said Jim Smart, chief financial officer – some analysts are less convinced.

There is also dissent over the value of the brands. Mr Smart sees his portfolio as “must stock” products. Toby McCullagh, analyst at Morgan Stanley, agrees the products carry strong brand loyalty, and is further encouraged by innovation plans. But others see a larder of products such as suet and canned rice pudding that is past its shelf-life.

“A number of the brands in there just don’t have growth, therefore it’s a process of managing decline,” says Mr Black. He points to Smash instant potato: “Dried potato was very innovative in the 1970s, but not in 2011.”

Much will hinge on Christmas trading, and not all the omens look good. As Mr McCullagh points out, Premier will hit tough comparables – last year, snow-panicked Brits stocked up their pantries – and “irrespective of which survey you look at, the British consumer is not in a good place”.
Despite making some headway repairing its balance sheet, average debt remains four times earnings before interest, tax, depreciation and amortisation after pending disposals.

Premier’s hope is that it can trade its way out. But analysts note even that looks more difficult given calls on cash over the coming year, including pension payments. Options therefore include further disposals – such as low-growth brands or the ailing Brookes Avana, which supplies own-label products – and fundraising.

The trouble with sales is finding buyers. Graham Jones, analyst at Panmure Gordon, says Premier owes its own portfolio to the fact it bought the businesses multinationals did not want. “Therein lies the problem.”

Premier had hoped to raise funds in the bond markets this year, but given current market conditions there are fears that it will have to do a rescue rights issue, though Mr Smart is adamant that this is not an option, not least because the costs would outweigh any benefits.

“A rights issue where the shares trade now would be catastrophically disastrous,” agrees Mr Jones. “It would be an absolute last resort. We are not at that stage yet. But it’s probably only one more profit warning away from breaking banking covenants, which is why it trades on the price it is now.”

Adds Mr Black: “It does feel like death by 1,000 cuts. In time there’s probably going to be another rescue fundraising at a very deep discount that a number of investors get an opportunity to get in at a very low price because there’s no plan B.”

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