The latest profit warning from Premier Foods has prompted more speculation about a sell-off of some of its brands.
But a leading analyst has warned that Premier needs to be more realistic about the valuation of its portfolio.
Dr Clive Black of Shore Capital said the costs involved in restructuring the business – which employs 15,000 people at 60 sites – could potentially minimise the benefits of any sales.
Today (October 7), Premier admitted its third-quarter results were “significantly below expectations” with sales down 3.6% to £477M, and Hovis taking a particular hit. It will not know the full extent of the damage to its full-year profits until Christmas trading is over.
Chief executive Michael Clarke said Premier would be focusing on eight “power brands”: Ambrosia, Batchelor’s, Bisto, Hovis, Loyd Grossman, Mr Kipling, Oxo and Sharwood’s. He added the company would “actively seek to dispose of businesses” outside these brands.
Black told FoodManufacture.co.uk: “I think there will be an opportunity for all the businesses within Premier Foods at the right price.
“But over the past 18 months Premier has attempted to sell things like RF Brookes and their price aspirations haven’t been right at a time when the business has been going backwards. Premier does need to set the right price, particularly when liquidity in the banking sector is a problem.”
Black said Premier had spent the past five years streamlining its production facilities and creating synergies, and a sale of brands could upset the balance that had been achieved.
"If there were now to be a period of fragmentation, does that lead to a fall in margins?” he said. “Lots of questions remain unanswered in terms of the cost of restructuring and exceptional items and asset values. Can the business generate funds from disposals that cover its debts and prevent earnings dilution?”
Many of Premier’s problems stem from frosty relationships with supermarkets, including a well-publicised spat with Tesco this year that led to delistings.
Premier’s grocery volume share fell by 2.3% points in the most recent quarter. Clarke admitted: “Our volumes have yet to fully recover from the slower-than-expected rebuilding of in-store presence following a customer dispute earlier in the year.”
He described the trading environment as “intensely competitive”.
Premier would aim to “strengthen our sales and marketing execution”, he added.
Black said: “There is no doubt that the latest profit warning is a very Premier-centric issue and reflects tremendous inadequacies in its trading relationship with the major retailers. That’s one of the key areas for it to focus on.
“In May, Premier was saying everything was hunky-dory – and two profit warnings later, things clearly ain’t. There’s a need to rebuild relationships with retailers, and whether that can happen quickly enough remains to be seen.”
Clarke is pursuing discussions with banks about a refinancing programme to help Premier cope with net debts that Black forecasts will have reached £850M by December.
Clarke said: “I am convinced that there are substantial opportunities here but there are also significant challenges that we have to overcome. We have brands that consumers like and talented, passionate people who are determined to turn the business around.”
Black described Clarke’s stance as “commendable” but said he remained cautious about Premier’s immediate future and continued to advise investors to sell.
“If they can come out the other side with the support of banks and pension trustees, and Michael Clarke can see through their plans, Premier may have a future. But there are a lot of ifs and buts there,” he said.