In an analyst note issued today (December 10), she said highlighted a negative market value of -£103M to Premier’s bread operations, which includes its Hovis brand.
However, she said the fact that a deal was even being discussed regarding that business indicated that there were players who did not share that view and were prepared to pump cash into it.
“We do not expect Premier to be paying an external party to take a stake in its bread operation, so the negative value … could look far too harsh. Even assuming a value of zero for bread, this would still add around £103M to the current equity value of the group.”
Even a joint venture or associate would reduce the group’s exposure to its underperforming bread operations, said Mallard. That would leave a more profitable and focused core grocery business, which would attract more investment.
She estimated the grocery division could deliver profit before interest and taxes of £207.5M in its 2014 financial year. That would represent a profit margin of more than 19%, versus a margin decline of 0.8% in bread, she added.
“Additionally, with some fresh injection of funding, maybe the bread business could be reinvigorated – either through capex [capital expenditure] to reduce manufacturing costs or marketing spend to rebuild the brand’s equity.
“It could result in a better business, which in time could be more attractive to an outright buyer.”
Julian Wild, partner with law firm Rollits, believed Premier would prefer an outright sale, rather than a joint venture. “Premier is much more interested in a straight sale if it can pull it off,” he told FoodManufacture.co.uk.
Accounting for a bread deal, fund raising and subsequent debt refinancing, Premier could wipe as much as £350M off its estimated £863.1M debt for the 2014 financial year, said Mallard. This could shrink it to £513.1M by her calculations.
According to informed sources, three parties remain in the running to clinch a deal for Premier Foods’ bread business, out of an initial group of nine or 10. These are: PAI Partners, which owns United Biscuits and R&R Ice Cream; Sun Capital Partners and The Gores Group.
It is believed Premier would attempt to wrap matters up before Christmas for a preferred price of about £100M. But some commentators have suggested the deal could fetch as little as half that amount.
A deal for Premier Foods’ bread business fell through earlier this year when it failed to secure the price it wanted. Were that to happen again, its share price would take a pounding, putting a lot of pressure on it to deliver this time around.