Should Greencore walk away from Northern Foods?

By Elaine Watson

- Last updated on GMT

Should Greencore walk away from Northern Foods?

Related tags: Northern foods, Batchelors, Ftse 250 index

Greencore is still not ruling itself out of the bidding for Northern Foods, but City analysts believe it may be better off walking away now than leveraging itself up to the hilt in order to trump Ranjit Boparan's 73p/share cash offer.

Although Boparan's bid has been recommended by Northern’s board, some observers still believe Greencore​ could still come back with a better offer.

Greencore meanwhile, has kept Northern Foods shareholders guessing, issuing a statement to the stock exchange yesterday saying that it is "still considering its options", ​amid press speculation that it has held discussions with other food manufacturers about joining forces to bid for Northern Foods.

However, analysts contacted by said it would struggle to beat Boparan without overstretching itself and might be better off opting for a more 'bite-sized' acquisition such as Premier Foods' own-label ready meals (RF Brookes) and cakes (Avana Bakeries) businesses.

Is it worth breaking the bank?

Greencore would have to provide a significant cash element to impress Northern Foods' shareholders, and risked "leveraging itself up to the hilt", ​one analyst told

"If I were Greencore, I'd just give up and go for something more bite-sized such as Brookes/Avana​ [Premier Foods' own-label ready meals and cakes businesses].

"The stock exchange announcement shows Greencore is clearly keeping its options open, but it's not looking very promising for them, and to be honest is it really worth breaking the bank? As we have seen with Premier, the City doesn't like over-leveraged companies."

While Greencore could potentially work with a private equity or trade partner ​to finance a bid - which would see the partner take over the branded parts of the business leaving Northern's own-label operations to Greencore - putting this together would be difficult given the short time window, he added.

Could Greencore tie up with Brookes/Avana?

As to whether Premier might sell Brookes/Avana to Greencore if Northern Foods slips through its fingers, it was not beyond the realm of possibility, said Evolution Securities analyst Alex Sloane.

"Clearly, step one for Premier is restoring profitability at Brookes/Avana before actively marketing it; the results​ [2010 sales were down 4.7% and profits slumped to zero] show that it is underperforming other suppliers to M&S, who have done reasonably well lately, and has probably suffered from under-investment as attention has been focused on Hovis and other parts of the business.

"Premier was very close to selling it in 2008 but my understanding is that financing for the buyer fell through at the last minute."

Panmure Gordon director of equity research Graham Jones agreed that with profits at Avana/Brookes contracting to zero​ in 2010, "now might not be the time for Premier to be actively marketing the businesses for sale", ​but were Greencore or another suitor to offer Premier's chief executive Robert Schofield £150m for the business he would "snatch its hand off".

Premier: Working with M&S on pricing and ranging

Premier blamed a 4.7% slump in sales at the division to £203m on contract losses and lower volumes sold on existing contracts, while the collapse in profits was blamed on lower volumes, lower prices, poorer mix and higher commodity costs.

However, bosses insisted they were confident they could work with key customer Marks and Spencer to return Avana/Brookes to profitability in 2011.

"Despite this severe downturn in profitability, we believe the Brookes Avana business continues to produce excellent quality products and that it has innovation credentials."

Northern Foods sale: The timetable

BH Acquisitions – the vehicle by which Boparan is seeking to acquire control of Northern Foods – sent out an official offer document to shareholders last week, with a deadline for receipt of replies set at 1pm on March 2.

Northern Foods' shares have been trading at around 74-75p since Boparan tabled his 73p/share offer, which suggests that the market may be expecting a counter-bid.

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