Glenboden M & A Originations

Secondary divestment candidates after Premier Foods’ acquisition of RHM

Priority Rating priority rating 3
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Origination Status group merger recommended offer in December 2006
Asset RHM Group, with iconic British brand portfolio (culinary and bakery products)
Buyer Premier Foods (UK), leading legacy brand ambient foods group
Seller shareholders of RHM (UK), leading domestic ambient foods group
Buyer Rationale to create the biggest foods business in the UK
Seller Rationale to be part of the biggest foods business in the UK
NBs Premier’s shareholders to keep 59%, and RHM’s 41%, of the merged group
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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 – 93% of the enlarged company’s 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 –core 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 aren’t growing much, and haven’t been since some time in the 1970s, so no ‘story’ premium.

On the other hand, these are both public companies with massive free-floats, so it’s 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).

Premier’s 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 (‘food accessories’ - sauces and spreads etc).

Their strategy is to focus on category –leading 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, Sharwood’s 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, Premier’s small fresh products business looks vulnerable (ready meals etc); it’s barely profitable, largely unbranded and not growing. Then there’s also RHM’s 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.

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THIS LEAD'S VALUATION
Size (€ mln) 3.000
Sector culinary products
Asset Quality UK branded no.1 or 2
Seller large plc
Buyer large plc
P/S 1,3
P/Ebitda 11,5
Type enterprise value
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