The acquisition of RHM by Premier Foods was greeted enthusiastically by analysts but while the GBP1.2bn deal gives Premier some prestigious brands, Katy Humphries believes questions remain over Premier’s plans for RHM’s non-branded milling and baking operations.
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Last week’s GBP1.23bn acquisition of RHM by Premier Foods has been widely welcomed by the market, with analysts and investors responding positively to the news. The deal unites Premier’s Batchelors, Quorn, Branston and Oxo brands with RHM’s Mr Kipling, Bisto and Sharwoods labels, creating a UK powerhouse of big-name brands. However, on closer inspection it is clear that the merger presents challenges as well as opportunities
Robert Schofield, chief executive of the highly acquisitive Premier, has flaunted his aim to further consolidate the UK food sector for some time now. In recent months, Premier has bought up the UK and Irish units of Campbell Soup and made a spirited bid for United Biscuits before withdrawing from the race for the UK food group. Moreover, having funded this deal with a new GBP2.1bn debt facility that was added to the GBP450m raised in a rights issue earlier this year, Premier still has GBP100m left in its acquisitions war-chest.
So Premier’s move for RHM should come as no surprise. In many ways, the deal is an excellent fit, providing key brands, GBP85m in annual synergies and the bulk necessary to negotiate favourable arrangements with retailers.
Announcing the acquisition, Schofield highlighted these issues to shareholders, who are yet to approve the deal. “This acquisition brings Premier more great British brands with leading category positions which fit naturally into our portfolio,” he said. “As we’ve done before, we intend to drive growth through innovation and investment whilst maintaining a tight control on costs. This acquisition transforms our scale and we believe it will enable us to be a better partner with our retail customers.”
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By GlobalDataThe deal, which values each RHM share at 352.45 pence, 29.7% above Friday’s closing price of 271.75 pence, is clearly good news for RHM shareholders, who have witnessed the food group’s stock perform consistently below its flotation price in July last year. “The board of RHM has long appreciated the commercial and financial logic of a combination with Premier,” said RHM chairman Jan du Plessis. “This transaction achieves that objective and delivers substantial value to our shareholders through both the immediate offer premium and participation in the enhanced growth prospects of the enlarged Premier.”
Premier believes the GBP1bn-plus price-tag is more than justified by the brands it is acquiring. However, it is worth remembering that in spite of its famous brands RHM issued a profit warning shortly after its flotation, and has since struggled to maintain returns.
Premier’s plans for RHM are simple. While keeping a tight rein on costs, it intends to invest in and develop the RHM brands, much as it did when it extended Branston through the launch of Branston branded baked beans.
“No numbers have yet been put on the level of investment in brands,” a Premier spokesperson told just-food. “We aim to bring out the potential of the brands. Hovis, for example, is an extremely strong brand. It currently only operates in the bread category. We will be taking a new look at Hovis and considering how it can be stretched into new categories.”
Premier also told just-food that it was unable to put a specific timetable on how quickly it expects the deal to be accretive to earnings, but added that it was confident of its ability to increase returns. The company pointed out that if the deal is approved it would not be completed until next March, following which there would be an extensive integration process.
However, analysts seemed confident that the deal would be making a significant contribution to Premier’s EPS growth in a relatively short timeframe. Goldman Sachs upgraded Premier from ‘sell’ to ‘neutral’ after the announcement, stating that it “could be positive in terms of value creation”. Goldman Sachs added that preliminary analysis suggested that the acquisition could enhance Premier’s EPS by between 10% and 15% in 2007 and 2008.
Meanwhile, in a research note Graham Jones of Panmure Gordon reiterated his ‘buy’ rating, suggesting that the deal is likely to result in EPS growth of 30% from synergies achieved in the coming four years. Likewise, analysts at JP Morgan said that the deal was a strategically sound decision, maintaining an ‘underweight’ rating. The investment firm said that it expects the deal to add 8.8%, 12% and 19% to EPS in 2007, 2008 and 2009 respectively.
With the acquisition Premier is getting more than some first-rate British brands however. It is also gaining a non-branded business of considerable bulk, a not-so-welcome addition perhaps for a company whose focus is clearly on branded growth. True, 51% of RHM’s turnover in the last fiscal year was generated by brand sales, but that leaves 49% of sales that came from the company’s non-branded milling and baking operations.
Certainly, RHM’s milling and baking business, which has been prone to the ups and downs of the commodities market and has lately felt the pinch of rising wheat prices, is not a core fit for Premier. Nonetheless, Premier told just-food that it does not plan to offload the business. “We have no intentions of selling any of RHM’s businesses,” Premier emphasised. “Bread and bakery will operate on a stand-alone basis while RHM’s other brands will be integrated.”
Clearly Premier has the will, but does it have the way to make RHM’s non-branded businesses profitable? There has been much talk of the company’s previous success in turning around underperforming brands, such as Quorn, leaving no doubt that Premier is an excellent brand-builder. Yet little heed has been paid to the milling operations that could prove to be, somewhat literally, a millstone around Premier’s neck, dragging profits down. If Premier has formulated a clear plan for these businesses, it isn’t letting on, so we’ll just have to wait and see what the food group does to maintain and grow non-branded profitability in the face of increasing raw materials and energy costs.
