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Choppy waters still ahead for Premier Foods on debt talks, analysts

By Jane Byrne , 18-Jan-2012

Recent trading momentum does not favour Premier Foods’ bid to get the upper hand in pending refinancing talks, claim market watchers.

Yesterday’s statement by management at the UK food group was not encouraging, said Shore Capital analyst Clive Black, despite the team's stated ambition to double the cost savings of £20m outlined in October last year to over £40m.

Premier announced a series of cost saving programmes to be initiated throughout the year that will result in reductions in the workforce - expected to amount to around 5% of the company’s current workforce of around 12,000 employees.

The food group stressed that discussions over a re-financing package “continue to make progress and it is anticipated that an appropriate agreement will be reached soon.”

But Black cautions: “We note that there is no mention of Premier’s year-end debt position in this update.” And Shore Capital said its does not believe recent trading momentum especially enhances Premier’s negotiating hand in this regard.

Premier plans to use the savings resulting from its rationalisation plan to double the marketing spend for its eight power brands: Hovis, Ambrosia, Mr. Kipling, Sharwood’s, Loyd Grossman, Bisto, Oxo and Batchelors.

But Black said that while Shore Capital had been positioning itself for a more sanguine stance on Premier Foods “subdued current trade, further downgrades to trading profits, the prospect of considerable redundancy costs impacting the 2102 financial out-turn, the uncertainty of refinancing and, if it does transpire at what cost, leaves us somewhat cold on the stock still.”

He claims that such factors look set to undermine the “demonstrably improved” control that new Premier CEO Michael Clarke seems to be bringing to the company, the potential benefit from cost reduction in due course and the promise of an improved performance from the group’s power brands.

Earlier this month saw media speculation that the UK food manufacturer was aiming to divest itself of its Hartley's jams and Hayward’s pickles businesses for over £200m (€242m) following on from the sale of its chilled foods division, Brookes Avana, and its Irish brands at the end of last year.

Shore Capital analyst, Darren Shirley, told FoodNavigator.com that nothing can be ruled out in terms of Premier’s disposal plans, adding that Hartley’s is a good brand in what is not a high performing category. "It would provide a consolidation opportunity for another jam producer as it is still a profitable arena."

But he flagged up analysts’ worries about the UK group’s “ever-decreasing circle”.

Shirley added: “All Premier brands are potentially for sale but we remain concerned about the group’s capacity to generate enough cash flow if it continues to shrink.”

Julian Wild, food group director at UK law firm, Rollits, agrees, and while he rates the new management team at Premier, he told this publication back in December: “Premier is desperate for cash. But the question is how, following these divestments, is the team going to be able to take the profits forward?”

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