The need for discretion and secrecy was paramount. The venue for the meeting
on a Thursday at the end of November 2006 was the £265-a-night Runnymede
hotel on the banks of the Thames near Egham in Surrey.
Robert Schofield, the man who had built up Premier Foods, knew that he was on
the brink of a deal that would transform the company; but he also knew that
news of his plans must not leak.
Together with his company chairman David Kappler, Schofield had already
persuaded Jan du Plessis, chairman of rival food group RHM, that the two
companies should join forces. Premier had grown powerful through
acquisitions, but this would double the company’s size. It was the deal
Schofield really wanted.
Schofield, Kappler and Du Plessis had held talks at Du Plessis’s offices at
the tobacco giant BAT, a company he also chaired, and they had agreed a deal
in outline. Teams of bankers had started haggling over terms.
Now, the final pieces were being fitted into the jigsaw. At the riverside
hotel, Schofield talked to RHM’s top managers to tell them of his plans. He
had RHM in the bag.
The following weekend, The Sunday Times revealed that Schofield was closing in
on his quarry. The next day, the deal was announced. Premier was paying £1.2
billion for RHM’s equity. Including RHM’s debt, the takeover put a value of
£2 billion on the company.
The City loved it. Premier’s share price hit 300p for the first time since the
company was floated in summer 2004 at 215p and went on rising.
But now, just over a year later, Premier’s shareholders are paying the price
for Schofield’s ambition.
Has Premier managed to achieve the savings it promised at the time of the RHM
takeover by dovetailing the two businesses together? Yes. Factories have
been merged and depots closed. But Hovis, the single biggest part of the RHM
empire, has seen its costs rocket as the global price of wheat has risen at
a phenomenal rate; the brand has also suffered a painful loss of share in
the bread market.
Over the past two months, investors have begun to appreciate the degree to
which Premier Foods is now financially stretched. The company’s share price,
which topped 330p amid the euphoria following the RHM deal, fell below 200p
three months ago. It now stands at 92p. Premier, the company that paid £1.2
billion for RHM’s equity, and was worth £2.8 billion at its peak, is now
valued at just £777m.
UNDER the leadership of Schofield, 56, the company’s growth has certainly
been spectacular. It has been built around a group of firms that were bought
in 1999 by the venture-capital house Hicks, Muse, Tate & Furst.
In 2002, Schofield added Bran-ston, Crosse & Blackwell, Sarson’s and Sun
Pat with a deal to buy a clutch of British businesses from Nestlé. Ambrosia
custard and rice pudding came in 2003 through a £106m deal with Unilever.
After Premier’s flotation in 2004, the company bought Bird’s custard and Angel
Delight from Kraft. And in 2005 came deals to buy the meat-free ranges of
Quorn and Cauldron.
The following year, Premier spent £460m to buy Campbell’s UK and Irish
operations, giving it control of brands such as Oxo, Batchelor’s, Homepride
and Fray Bentos.
It made for a slightly strange mix of brands – often with a dated feel. Paxo
stuffing, Atora suet and Batchelor’s met Loyd Grossman, Marvel powdered milk
and Rose’s cordial.
But throughout the company’s headlong expansion, Schofield, formerly chief
executive of United Biscuits, showed a ruthless willingness to cut costs and
squeeze higher profits from the expanding operations under the Premier
umbrella.
He did suffer one setback to his ambitions. In 2006, he targeted his old
employer United Biscuits when it was put up for sale. Premier joined forces
with the private-equity group Lion Capital (a spin-off from Hicks, Muse) to
bid for the company. But they were beaten by Black-stone and PAI Partners,
which secured United Biscuits for £1.6 billion.
Within months, Schofield was in pursuit of RHM - the deal that has so
stretched Premier’s finances.
True to form, Premier has found ways of saving money by closing factories as
it integrates the businesses it has bought. In July last year, the company
announced it was closing six plants, affecting 1,000 jobs. Premier reckons
that it will eventually manage to wring annual savings of £113m out of the
consolidation.
But in the meantime, RHM’s bread operation - which includes Mother’s Pride as
well as Hovis - has been hit hard by competition from Warburtons, the fast
expanding privately owned bakers.
Charlie Mills, food-industry analyst at Credit Suisse, said: “It seems that
three things happened. It was almost as if RHM gave up fighting. Second,
they found themselves shorter of wheat than anyone else when the price was
going up. And in the areas W a r b u r t o n s has decided to tackle, RHM
has lost out.” The price of wheat has been a huge factor in squeezing the
profits of all bakers. The price was fairly stable until last summer, but
then it rocketed, doubling from £100 a tonne to £200 within a few months.
Mills estimates that each £10 on the price of a tonne of wheat raises the cost
of making a standard loaf by about 0.75p: retailers will typically match
that rise in increased margins; so a £100-a-tonne increase in wheat prices
lifts the retail price of bread by about 15p. For Premier, wheat accounts
for almost 30% of the group’s entire raw-materials bill.
Far more important has been Hovis’s loss of market share. At the time the deal
was announced, RHM had more than 19% of bread sales. According to market
research company AC Nielsen, that share was below 16% by late last year.
Mills said: “The bread industry may be moving to a one or two brand industry,
and there is no guarantee Hovis is one of those brands.”
But are the problems facing bakers sufficient to explain the City’s lack of
affection for Premier? Not at all. Certainly, the company is still making
money: analysts reckon that it will turn in pretax profits of perhaps £170m
for 2007 when it reports full-year results this week. ITS problem is
cashflow. Net debts are nearly £2 billion. It has some properties to sell,
largely a result of factory closures. And there are one or two businesses it
could sell. Premier has a French operation making part-baked products. That
is likely to be put up for sale.
Disposals will not be enough to solve Premier’s problems. It is clear that
Premier will both cut its final dividend payment for 2008 and will tell
investors that they have to expect smaller dividends than they had been
hoping for.
The company paid 4.3p a share at the interim stage in 2007. Until recently,
when the depth of Premier’s problems became clear, shareholders had expected
a further 8p or so for the final. That will no longer happen. The only
question is whether Premier will scrap the final dividend completely or
merely reduce it.
Premier has already said publicly that it will not be asking shareholders for
money through a rights issue. But one way or another, it has to cut its
debts: a dividend reduction is the only realistic way of doing so.
Premier has tried to calm the fears about its finances by saying it has not
broken its banking covenants for 2007 and that, on current projections, it
shouldn’t do so in 2008. But what exactly are those covenants? The lack of
clarity is one of the things that is spooking investors.
Certainly, Premier’s lenders have set limits on the relationship between net
debt and cashflows. But the offer document for RHM also gave a glimpse of
obligations to pay down debt. The company was due to repay £60m by the end
of 2007. It has to repay £180m at the end of 2010. The picture for the years
in between is not clear.
Martin Deboo, food industry analyst at Investec, said: “They really do need to
start showing a degree of glasnost.” It is a concern that has now sunk in at
Premier’s St Albans head office. On Tuesday, the company plans to give far
more details about the constraints on its finances.
Nobody should expect an ounce of regret from Schofield or his colleagues about
having spent so mightily on RHM. They will insist that it was a deal that
fitted exactly with their strategy of concentrating on branded products and
of using larger and larger scale – this is, after all, a £2.6 billion-a-year
business - to drive down costs and give bargaining muscle when dealing with
supermarkets. The bread business, they insist, will come right in the end:
Hovis is as strong a brand as anyone could wish for.
Premier may be learning to do glasnost. But it doesn’t like apologising.
WARBURTONS BECOMES THE BEST THING IN SLICED BREAD
A DECADE AGO the British bread industry was dominated by two quoted players -
RHM and Associated British Foods, the company behind Kingsmill, Allison and
Sunblest.
But now the privately-owned Warburtons group, a company that traces its roots
to 1876 and remains under the control of the Warburton family, has emerged
as the most powerful force in British baking.
Warburtons began in Bolton, Lancashire, but has grown steadily beyond its
heartland. It now has 13 bakeries, the most southerly at Enfield, north
London, and Newport, South Wales.
Only five years ago Warburtons held less than 15% of the UK bakery market. Now
it reckons to have 22.6%. In the market for wrapped loaves, it eclipses ABF
and RHM with just over a quarter of the market, producing 2m loaves a week.
RHM has 16% and ABF 13.2%.
“Their bread has been of consistently higher quality,” said food-industry
analyst David Lang of Investec Securities. “They have steadily expanded into
new areas, but haven’t rushed their fences. I reckon they have invested
about £200m over the past 10 years - more than Allied [Bakeries, part
of ABF] or RHM.”
Warburtons has shown a striking confidence in its products, rarely using
price-cutting to win new customers. At the moment, a standard Warburtons
loaf costs about £1.16 - a few pence more than Kingsmill or Hovis.
Warburtons has financed its expansion entirely from the company’s prodigious
cash flow. The most recent accounts, for the year to September 2006, show
that it had £23.6m in the bank – and that was after having
invested £94m within two years.
