Glenboden M & A Originations

Premier should sell Hovis and rally with UB buy

Priority Rating priority rating 2
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Origination Status market speculation, September 2013
Asset bread division of Premier Foods (UK), top 3 domestic packaged bread producer
Buyer candidates include Grupo Bimbo (Mexico)
Seller Premier Foods plc (UK), leading domestic legacy ambient food brands group
Buyer Rationale step-change in scale in leading European market
Seller Rationale debt reduction, funding of UB acquisition
NBs bread portfolio includes 'Hovis' and 'Mother's Pride' brands
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Glenboden believes that Premier Foods should aim to sell its bread division to Grupo Bimbo. Hovis is on Bimbo's M&A trajectory at this point in time; that division is locked into a low valuation position which is unlikely to improve; a better option for Premier is to rally by acquiring United Biscuits later.

Hovis is on Bimbo's M&A trajectory ...Grupo Bimbo of Mexico has become the largest bakery group in the world, largely through bold acquisitions in recent years in north America.

From a low base, it acquired Dunedin from Weston Foods in 2008, then Sara Lee's NAFB division in 2010, to become market leader in the US where over 50% of its sales are now generated.

It's first M&A foray into Europe was the purchase of Sara Lee's Spanish and Portuguese businesses in 2011. By storming the UK market through acquiring Hovis, Bimbo could replicate its US expansion.

That would also be consistent with recent M&A activity in the UK, where legacy brands have been snapped up by foreign investors step-changing their presence in that high-value market. Examples include Intersnack buying KP Snacks, and Suntory buying Lucozade.

... Hovis locked into low valuation ...From Premier's perspective, the sale of Hovis might allow a reduction in its pro-forma net debt ratio to around 3,5 (see profile and valuation). NB. for valuation we have used 2012E EBITDA for underlying bread business before asset impairment charges.

Wait for better times before selling ? Maybe not - Hovis sales have been flat in recent years, and it's locked into a threeway competitive tussle with ABF and Warburton's for those critical contracts with the big UK retail multiples.

That means UK bread is comparable to UK milk; the same threeway tussle, where in 2012 Wiseman was bought by Mueller for x6 EBITDA - just as we've predicted for Hovis also (see valuation). There's no sign of that changing.

... Premier could rally with UB purchaseAssuming its covenants for debt reduction are not too restrictive, could the sale of Hovis release Premier to acquire the sweet snacks business of United Biscuits, after the sale of its savoury snacks side to Intersnack in 2012 ?

A much higher margin business than Hovis, UB could be an ideal adjacent categories fit for Premier Foods - the group's core Grocery division is strong in branded culinary products, but weak in biscuits and other sweet snacks.

The private equity owners of UB, Blackstone and PAI, have been trying to exit the business since 2010. In 2012 they sold only the savoury snacks part of UB, to Intersnack. Could the sweet snacks part now be teed up for Premier to buy ?

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THIS LEAD'S VALUATION
Size (€ mln) 350
Sector packaged bread
Asset Quality UK top 3 branded
Seller large plc
Buyer large plc
P/S 0,6
P/Ebitda 6,0
Type value estimate
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