Premier could sell Hovis to fund UB acquisition
- August 17, 2010
||proprietory origination, August 2010
||'Hovis' bread and baked products business unit (UK), no.2 domestic branded bread producer
||candidates include Warburton's, Grupo Bimbo, Flower Foods
||Premier Foods plc (UK), no.1 domestic branded ambient grocery producer
||brands and market position in high -value UK market, international expansion
||exit from low -margin business, raise funds to acquire United Biscuits
||Premier assumed Hovis as part of RHM acquisition in 2007
Apparently the private equity owners of United Biscuits are looking to sell it. In that case Premier Foods has the opportunity to do a portfolio re-shuffle a la Danone or Kraft; sell its low -margin 'Hovis' bread business, and buy the higher -margin UB. Premier wants UB, but couldn't fund the acquisition without selling Hovis.
Arguably Premier owns Hovis by accident, as it was part of the RHM group, which Premier acquired in 2007 primarily for its culinary products brands like Sharwood's and Bisto.
The fact that Premier has kept Hovis since then as a stand -alone business, because of its different distribution model and upstream milling operations, makes the re-sale of Hovis to a third -party all the easier.
In 2009, Hovis booked an EBITDA margin of only 8%, when Premier's average was 14%; given Hovis' size (see chart), that makes it a significant drag on the group's profitability.
Also, in spite of growth in the branded side of Hovis, that division's sales in value terms fell by 3,5% in 2009.
On top of that, Hovis depresses Premier's focus on branded as opposed to private label sales; in 2009 branded accounted for 55% of total Hovis sales, when the group's average was 65%.
UB would be an ideal adjacent categories fit for Premier Foods. The group is very strong in branded culinary products and dry foods, but weak in biscuits and other snacks. UB would add those large categories to Premier's offering.
By 'replacing' Hovis with UB, Premier's group EBITDA margin would increase, since UB's margin is nearly 18%; more than twice that delivered by Hovis.
Also, Hovis had sales revenue in 2009 of 750 mln GBP; UB achieved 1,25 bln GBP. The net result of selling the former and buying the latter would be that Premier's top line would grow by about 20%.
Valuing Hovis, which is in the low -margin packaged bread business, but also has a strong market position and brands, is not easy.
If we take Grupo Bimbo's acquisition in 2008 of Dunedin, a leading branded bread and baked goods business in the US, as a nearest comparative transaction, then we get a price for Hovis of about 0,6 bln GBP (see valuation).
That compares with our earlier estimate for the enterprise value of UB of 3,0 bln GBP (see related lead). In that case, UB is worth five times as much as Hovis. Can Premier afford it, even after selling Hovis ?
Putting the jigsaw together, and 'broad brushing' the calculations, Premier's 2009 EBITDA, with UB but without Hovis, would be about 0,6 bln GBP.
Meanwhile Premier's net debt at the end of 2009 was 1,4 bln GBP. By adding a further 2,4 bln GBP, resulting from the Hovis and UB 'swap', that net debt would increase to nearly 4 bln GBP.
That would mean Premier's net debt ratio would increase to over x6,0 EBITDA. But with a good conversion of EBITDA into free cashflow in 2010, that ratio could in practice be around x4,0 EBITDA; still high, but acceptable given synergies.
Although there seem to be a number of major bakery products divestments in the pipeline, at this time, we believe that buyers could be found, especially in the UK and, potentially, from the Americas.
Family -owned Warburton's, the no.3 packaged bread player in the UK, is an obvious potential acquiror; the deal would mean however that they discard their one-brand business model.
Longer shots include Grupo Bimbo from Mexico, given their voracious M&A appetite and scale. Also Flower Foods from the US, which is a somewhat 'parallel' business to Hovis in that market.