Secondary divestment candidates after Premier Foodsâ acquisition of RHM
- December 04, 2006
||group merger recommended offer in December 2006
||RHM Group, with iconic British brand portfolio (culinary and bakery products)
||Premier Foods (UK), leading legacy brand ambient foods group
||shareholders of RHM (UK), leading domestic ambient foods group
||to create the biggest foods business in the UK
||to be part of the biggest foods business in the UK
||Premierâs shareholders to keep 59%, and RHMâs 41%, of the merged group
The British are very attached to their legacy brands, especially in ambient foods, that have been around for the best part of 100 years. Brands that are unknown outside Britain â 93% of the enlarged companyâs sales will be in the UK, the rest being sold mostly to British ex-pats overseas. There are likely to be some divestments of non âcore brands and categories, once the profile and priorities of the enlarged group emerges; most likely is fresh foods and, ultimately, the whole breads division of RHM.
The valuation looks quite market-level, in both EBITDA multiple and sales multiple terms; these are categories which arenât growing much, and havenât been since some time in the 1970s, so no âstoryâ premium.
On the other hand, these are both public companies with massive free-floats, so itâs largely about the same investors taking money from one pocket and putting it into another, and looking forward to synergy benefits (85 mln GBP expected annually).
Premierâs portfolio is very diverse, but it mostly consists of canned foods (where the company started when it grew out of Hillsdown Holdings in the 1990s), and a wide range of culinary products (âfood accessoriesâ - sauces and spreads etc).
Their strategy is to focus on category âleading brands, in which investment can be justified in service, innovation and marketing to appease the big retailers. RHM will add British icons like Hovis, Bisto, Sharwoodâs and Mr Kipling, to this portfolio.
But some brands and categories will not meet the category -leading criteria, or financial criteria, after the merger, and will head a list of divestment candidates.
The RHM bread bakeries business, which is as large as the whole of pre-deal Premier in turnover, will remain stand-alone, because of its different distribution model and milling operations. That sets it up nicely to be divested or de-merged later on.
More pressingly, Premierâs small fresh products business looks vulnerable (ready meals etc); itâs barely profitable, largely unbranded and not growing. Then thereâs also RHMâs cakes business, where restructuring is already underway.
Maybe these will all be sold, and the enlarged group will downsize over time, to focus purely on its stable of brand-leader culinary products, where margins are highest.