Essenta Foods: A marriage made in heaven. But who wears the trousers?

26-Nov-2010 - Last updated on 13-Jan-2011 at 10:44 GMT

A merger of equals?

It hasn’t generated quite as many column inches as the impending nuptials of Kate and Wills, but the prospect of two of the biggest players in the UK chilled convenience market tying the knot is big news for the food industry.

But is it a match made in heaven? And who will wear the trousers?

The logic behind the creation of Essenta Foods (not as baffling as Consignia, but it will take some getting used to) is certainly compelling to shareholders, although staff and suppliers now face an anxious wait to find out how the new couple will handle affairs once their union is sealed.

That said, factory employees can probably sleep more easily than their colleagues in head office when pondering how the proposed £15m in overhead cost savings will affect their job prospects, notes Shore Capital analyst Darren Shirley.

“We see limited need or scope for the rationalisation of the plants across the UK and Ireland for the combined group. The manufacturing estate is also well-invested and Northern Foods is in the process of upgrading its biscuit operations through Project Golden.”

Moreover, both firms have already slimmed down their ready meals portfolios in a bid to bring chilled supply back in line with demand. More rigorous spring-cleaning over the past five years or so has also seen Greencore exit sugar, water, malting (and the Netherlands) while Northern has offloaded a raft of businesses from Dalepak to Fox’s Confectionery, Eden Vale (Ski, Munch Bunch), NFT, Park Cakes and Smiths Flour Mills.

Surprisingly little overlap

On the customer side, meanwhile, there is surprisingly little overlap in food to go: Northern's key customers are Costa Coffee, M&S and Tesco, and Greencore's are Asda, the Co-operative Group, Morrisons and Sainsbury's.

Similarly, in chilled ready meals, Northern Foods’ biggest customer is M&S, while Greencore supplies Asda, Tesco and has the Weightwatchers contract.

In other words, while some ‘rebalancing’ of supply is possible further down the line, none of the major supermarkets is particularly over-exposed to £1.7bn turnover Essenta as things stand.

“We sense that the retailers in the main will have 'given their blessing' to this deal" says Shirley. Indeed, sounding them out was probably a key part of the firms' due diligence, he suggests.

Management

However, staff working in Greencore’s UK hub in Chesterfield and Northern Foods’ head office in Leeds, shared service centre in Wakefield and technical services centre in Nottingham face a difficult few months, following the announcement that the happy couple plan to make Dublin their base.

On the plus side, Essenta Foods will at least retain a 'UK operational centre in Yorkshire' and there have been strong hints that the Leeds office will continue to play a role in the combined business.

Suppliers

As for suppliers, there will be winners and losers – some stand to gain more business, others will lose - while those already supplying both the bride and groom will be expected to offer keener terms in order to retain the new couple's favour.

We know little about the marriage vows, beyond the fact that savings of about £40m have been promised over three years: comprising £15m from overheads, £20m from purchasing and supply savings and £5m from financing and tax.

What further savings the couple can extract from stretching their combined brands across a broader set of categories "leveraging distribution channels, brands, product portfolios and research and development capability across the combined group" remain to be seen.

Marriage of equals?

As to who will wear the trousers in this marriage, Greencore boss Patrick Coveney will be crowned king, which might suggest the Irish contingent will have the upper hand, but there are no indications at this stage that it will not be the 'merger of equals' promised.

And while Northern Foods boss Stefan Barden will not appear at the altar, he can take the helm at Brakes' UK arm in January knowing he has delivered significant improvements in Northern's chilled and biscuits operations, even if the frozen division has proved a tougher nut to crack.

Counterbids?

But will a rival suitor emerge to spoil the engagement party?

The prospect of a counterbidder for either bride or groom cannot be ruled out, although arguably interested suitors have had plenty of time to make approaches before now, especially given the low stock ratings for both companies' shares.

And while the two boards' respective recommendations mean a “robust alternative proposition would need to be tabled”, a better offer could always emerge between now and next year, when the marriage register is finally signed.

So watch this space."We do anticipate considerable speculation in the interim period ...” said Shirley.

The timetable:

December 2010: Shareholder documents to be posted.
January 2011: EGM and shareholder meetings.
March 2011: Publication of the Essenta prospectus and target month for OFT clearance.
April 2011: Assuming no glitches, the courts should approve the merger.

ESSENTA FOODS AT A GLANCE…

CHILLED PREPARED FOODS, SOUPS:

Warrington – chilled meals (Greencore)
Wisbech – chilled meals (Greencore)
Kiveton – quiche, flans, spreads (Greencore)
Cavaghan & Gray, Carlisle - chilled meals (Northern Foods)
Newburyport, Massachussetts, USA – (Greencore)
Pennine Foods, Sheffield - ready meals (Northern Foods)
Bristol - chilled sauces & soups (Greencore)
The Pizza Factory, Nottingham - chilled pizzas and toppings (Northern Foods)
Grimsby – soup (Northern Foods)
Solway Foods, Corby - salad meals, pasta salad snacks (Northern Foods)

FOOD TO GO:

Manton Wood – sandwiches (Greencore)
Park Royal – sandwiches (Greencore)
Bow - sandwiches, baguettes, prepared salads (Greencore)
Cincinnati, Ohio, USA - sandwiches (Greencore)
Gunstones Bakery, Sheffield - sandwiches, sushi, bread products (Northern Foods)
Solway Foods, Worksop - sandwiches and wraps (Northern Foods)
Holland’s Pies, Baxenden - pies (Northern Foods)