Premier sells Quorn and Cauldron in £205m deal

By Elaine Watson

- Last updated on GMT

Premier sells Quorn and Cauldron in £205m deal

Related tags: Quorn

Premier Foods has struck a deal with Exponent Private Equity and Intermediate Capital Group to sell its meat-free business Quorn and Cauldron Foods in a £205m deal.

Rumours that Premier was close to sealing the deal have been gaining momentum over the past few days, as revealed by FoodManufacture.co.uk yesterday​.

Premier, which acquired Quorn's owner Marlow Foods in June 2005 for £172m rapidly followed by Cauldron in October 2005 for £27m, said the combined meat-free operation was expected to report sales of £128.8m and profits* of £19.3m in the year to December 31, 2010.

The deal, which is expected to complete in early March, would reduce debts and allow bosses to focus on the grocery and Hovis businesses, said chief executive Robert Schofield (pictured).

Overseas opportunities

Chris Graham, founding partner at Exponent, said there was a lot of potential to grow Quorn's overseas sales, an area of opportunity that Premier had not fully exploited: "With additional investment both in the UK and internationally we believe we can grow the business further."

Under Exponent's ownership the management team at the meat-free business, which operates from three sites in Methwold, Belasis and Stokesley and employs 595 people, will continue to be led by Kevin Brennan.

Sales of the meat-free business had increased by 29% under Premier Foods' tenure, said Schofield. However, his strategy was UK-focused,

"Therefore, the group will not prioritise the development of the commercial infrastructure and distribution channels required to penetrate and expand in international markets".

Meat-free: Back in growth

Total meat-free sales were up 1.6% to £32m in the three months to September 30 after a disappointing first half, a turnaround Schofield said was encouraging given that the UK market for meat-free products was down 9.1% over the same period.

Methwold restructuring

While a re-organisation of one production line at the factory in Methwold, Norfork – where Cauldron products used to be manufactured and Quorn is packed – has recently delivered a 10% improvement in throughput, the meat-free division has struggled to realise its potential in recent years.

Premier spent £3m last year and a further £1m in the first half of 2010 on "supply chain restructuring initiatives​" to resolve "production inefficiencies​" at Methwold, which has undergone significant restructuring in the past year with the outsourcing of Cauldron-branded tofu products, allowing it to focus on Quorn.

According to Premier, "Methwold was hampered by an inefficient tofu manufacturing process so the decision was taken to outsource production of Cauldron products to third party manufacturers with more modern facilities."

The restructuring saw the senior management team cut from eight to five and the total indirect staff reduced by a third, saving £1m. Further cuts in factory overheads delivered additional savings of £1m, revealed the firm in the September issue of staff newsletter Being Premier.

Hands off - and then hands back on ...

One source told FoodManufacture.co.uk: “When they acquired Marlow Foods​ and Cauldron, they were very hands-off, and they let them get on with it.

“But while Quorn really should be the jewel in Premier’s crown - it ticks all the right boxes as a more sustainable source of protein - it has not been a big money maker. But I think it probably could be for someone else.”

City: Trade did not see value in bid price

Shore Capital head of equity research Dr Clive Black said the fact that it had had to effectively sell off the family jewels reflected the weakness of Premier Foods’ position.

Despite the obvious fact – laboured by Premier today - that disposing of meat-free would better enable it to focus on the rest of its business, the fact remained that “management is selling the family silver because it has to”​, said Black.

“What we deemed to be ill-disciplined and poorly considered acquisition activity, which resulted in over-indebtedness, subsumed the virtues of meat-free and now from a position of relative weakness, to our minds, the business has been disposed.

“We note, with interest, that this is a financial deal and not a trade sale; suggesting that the trade, which should gain stronger benefits than financiers, did not see the value in the bid price,”​ he added.

By reducing its debt:EBITDA ratio via the disposal, “Premier Foods’ constitution becomes that little bit more robust, so long as operating cash flows remain firm”​, noted Black, who has a SELL rating on Premier’s stock.

But he added: "We need much more confidence that operating cash flows can be sustained from a business that cannot acquire and for whom there remain trading challenges for our caution to change.”

Bell: We must overcome tendency to act like traders instead of brand-builders

In the December issue of Being Premier,​ new chairman Ronnie Bell told staff that he was well aware that 2011 had to be the year of delivery for the business, which one corporate finance source told FoodManufacture.co.uk last month was "going absolutely nowhere".

Bell said: “There are some challenges in terms of our balance sheet, the complexity of operations, the variable quality of some of our manufacturing sites and our tendency to act like traders rather than brand builders, but nothing that cannot be addressed.

“My initial priorities are all about delivery. We need to deliver the financial strategy, deliver our trading results, deliver more innovation and growth, especially for drive brands, and deliver development for our people.”

Premier Foods will release its full-year results for 2010 on February 15.

*EBITDA (earnings before interest, tax, goodwill amortisation and depreciation.

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