Cake, gravy and cooking sauces maker Premier Foods (PFD) has sold its stake in bread brand Hovis to private equity firm Endless in a deal which will strengthen the food producer’s balance sheet.
Shares nudged up 1.5% to a five-year high of 105.1p on news of the transaction, which completed last night and should help lockdown beneficiary Premier Foods to further reduce its debt load.
Alongside joint venture partner, the Gores Group, Mr Kipling-to-Bisto maker Premier Foods has held a 49% minority interest in Hovis since April 2014.
Under Gores and Premier Foods’ ownership, the business has undergone ‘major supply chain restructuring’ and is now focused on bread baking following the disposal of its milling business.
According to today’s statement from Premier Foods, Hovis is commercially well-positioned to grow under new ownership. Newlat Foods had confirmed an interest in making a bid, but the Italian firm pulled out of the running earlier this week, clearing the path for Endless.
Premier Foods is to receive total proceeds of £37 million from the disposal, which includes the repayment of outstanding loan notes and accrued interest.
ANOTHER WELCOME STEP
Shore Capital initially expects the cash to sit on the balance sheet and does not yet know how the proceeds will ultimately be utilised, though it suggests some proceeds could be used to fund the deficit in the Premier Foods pension fund.
‘Whatever the final application, we see the proceeds as another welcome step in the broader deleverage of the Premier Foods Group,’ commented the broker, ‘noting we currently forecast net debt at March 2021 of £387 million’, for a net debt to EBITDA ratio of 2.4 times.
As Shares chronicles here, Premier Foods had been languishing at a lowly 19.4p in March. Since then, they’ve enjoyed a stunning re-rating thanks to improving earnings momentum as well as a transformational deleveraging of the balance sheet which have combined to resurrect this erstwhile corporate zombie.
Results for the year to 28 March revealed trading profit at the top end of market expectations as well as a £62 million net debt reduction, lowering Premier Foods’ leverage ratio to 2.7-times.
More recently, Premier Foods revealed (6 Oct) its intention to redeem £40 million of £130 million of outstanding bonds, in addition to an £80 million redemption completed in June. The move is expected to save up to £2 million a year in interest costs.
LOCKDOWN WINNER
Premier Foods, whose other food brands include Ambrosia, Sharwood’s and Loyd Grossman, serves up half-year results next week (10 Nov). Ahead of the print, Shore Capital forecasts tasty 37% pre-tax profits growth to £43.5 million.
Reiterating its ‘buy’ rating on Premier Foods this morning, the broker sees the potential for ‘operationally driven upgrades as the group continues to harvest the benefit of the transfer of calorie consumption to the grocery retailers from out-of-home, a process we expect to benefit from lockdown 2.0 which comes during a seasonally important trading period for Premier Foods.’
