City: Mass factory closures unlikely in Greencore - Northern Foods merger

By Elaine Watson

- Last updated on GMT

Coveney: "Tangible cost synergies"
Coveney: "Tangible cost synergies"

Related tags: Northern foods, Supply and demand, Grantham

While the proposed merger of Northern Foods and Greencore will inevitably mean job losses at both companies, it is unlikely to result in scores of factory closures, City analysts have predicted.

Speaking as bosses at Northern Foods and Greencore proposed a ‘merger of equals’ to create a new business called Essenta Foods, Shore Capital analyst Clive Black said: “Interestingly, neither company serves the same product to the same customer.”

He added: “We expect little by way of factory rationalisation, not least because ready meal and sandwich capacities are tight at present and growing at high single digit rates, whilst bakery and frozen pizza facilities are distinct to Northern Foods."

Both firms have closed factories in recent years to tackle overcapacity, with Greencore recently arguing​ that this had "gone some way towards rebalancing supply and demand" ​and Northern Foods revealing last week that it is not planning to re-open its mothballed Fenland Foods factory in Grantham after all.

Tangible cost synergies

Essenta Foods, to be led by Greencore boss Patrick Coveney with its headquarters in Dublin and a UK operational centre in Yorkshire, should be trading in the FTSE-250 by the second quarter of 2011 (subject to regulatory clearance and shareholder approval), said Coveney.

“This merger creates a substantial chilled prepared food company in fast growing categories in the UK which is enhanced by strong branded positions in biscuits and frozen food.

“The investment case is underpinned by tangible cost synergies and the platform for further growth in the UK, Ireland and the US.”

The partners forecast synergies of about £40m to be delivered over three years, comprising £15m from unspecified 'overheads', £20m from purchasing and supply savings and £5m from financing and tax.

They also anticipate "certain revenue synergies through leveraging distribution channels, brands, product portfolios and research and development capability across the combined group".

How will retailers react?

Panmure Gordon analyst Graham Jones said the tie up made a “lot of sense”,​ but added: “The key question will be whether the new group will lose any significant volume from retailers ‘rebalancing’ their supply.

“How much rebalancing will the supermarkets do if they feel over-exposed to the new combination?”

As for the proposed synergies, he added: “All these estimates, on a first glance, look perfectly achievable, although the question as always is how much will be retained to the bottom line.”

Related topics: Business

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