Cowardice or wisdom?
Having developed steadily for three decades through a mix of organic growth and acquisitions since its foundation in 1975 till its listing on the London Stock Exchange in 2004, Premier Foods’ M&A strategy became increasingly bold from 2004 onwards, broadening its portfolio of brands to include Ambrosia from Colman (Unilever), as well as Angel Delight and Bird’s from Kraft Foods. What an irresistible ascension one might be tempted to think.
My first direct high-level contact with Premier Foods took place in the late afternoon of Wednesday 13th September 2006, a date I remember well because Premier Foods were about to formally bid for United Biscuits, expecting their £ 1.7 billion bid to be the winner. I was told this would make big headlines in the media on the Friday, and was asked to be ready, on the starting block, to possibly commence work on the following Monday on the integration of United Biscuits into Premier Foods. What an exciting prospect!
Meanwhile, half a mile away from the office in which I had spoken to Premier Foods’ two envoys, things were about to go horribly wrong. The following morning, Lion Capital who were one of Premier Foods’ backers announced they were pulling out of the consortium. And so the deal collapsed at the eleventh hour. Friday’s headlines were not the triumphant news we had hoped for; instead, the media concluded that with Premier Foods dropping out of the race, United Biscuits would end up in the hands of Blackstone and PAI; which it did, less than three weeks later, for £ 1.6 billion.
Looking back on those events and the intense frustration I felt at the time at not being given the chance to manage that significant post M&A integration, I have come to realise the extent to which Lion Capital’s last minute withdrawal was prompted by sound business acumen rather than a lack of courage and ambition. Wisdom, not cowardice. In those days, before the world’s financial communities hit the 2008 brick wall, it seemed to many that the sky was the limit and that a solid “can do” mentality could overcome any challenge. But Lion Capital were wise enough in the euphoria of that era to realize that a £ 1.7 billion acquisition added to the £ 1.2 billion deal Premier Foods had initiated only a few months earlier for Rank Hovis McDougall (RHM) was more than the group would ever be able to digest.
Up and up and up … and down : the story of the collapsed soufflé
Unfazed by the collapse of their attempted bid on United Biscuits, Premier Foods completed their RHM deal during 2007, stretching their finances to their very limit and spooking the markets. By the time the shockwaves of the 2008 downturn hit the world’s economy, Premier Foods’ shares had already lost half their value. The buzz word “growth” was replaced by “debt reduction”, sparking off a succession of plant closures and divestments. Premier Foods’ decline continued until 2011, reaching dismal lows from which the company has not recovered.
Premier Foods’ shares have lost 99.5% of their value since their peak in February 2007. Between 2011 and now, there actually have been a few positive blips, but no sustained growth trend. Some attempts were made at rejuvenating or re-launching a few brands, however without impressing the markets.
Over-confidence or arrogance?
After years of underperformance, the bid Premier Foods received from McCormick should be considered as the deus ex machina that could save the future of the group. Instead, Premier Foods’ board flatly rejected the first and second bids made by the North American potential saviour. That was to be expected as being part of the usual bartering process, but what I find extraordinary is that the argumentation of Premier Foods’ CEO Gavin Darby is based on the undervaluation not only of Premier Foods’ “as is” value, but of its future development plans. Dare we ask what plans? When Gavin Darby took over as CEO of Premier Foods in February 2013, the company’s ordinary shares were trading at 69.1 pence; a dismal price compared to the 2,200 pence six years earlier, but still far better than today as the shares lost more than half of their value during Gavin Darby’s tenure to reach a very sad 30.25 pence.
With the McCormick bid causing the Premier Food share to suddenly wake up and jump close to 60 pence, Mr Darby’s comment that the bid significantly undervalues the company’s potential is rather incongruous; given the declining track record to date, it is hard to imagine that he has a Plan B in his left pocket that can rapidly double the value of the company. It is no wonder his comments have angered Premier Foods’ two main institutional shareholders.
Premier Foods or pension foods?
Time is running out for Premier Foods. One fails to imagine how the company can continue much longer to finance the burden its 60,000 pensioners: the pension fund alone has a deficit of £ 300 million and the company is still sitting on a mountain of debt in spite of the refinancing of 2014. It will take a strong owner to put Premier Foods back on track, with sufficient financial clout to continue investing in product development and innovation whilst settling all the other commitments. That strong business could be McCormick.
Mr Darby is still confident that other suitors will soon appear and cause the bids to rise, just as he seems convinced that the development plans he has kept hidden in his back pocket all these years bear the promise of a golden future for Premier Foods. Who knows, he might be right, but it is at best gamble, and given the track record of the past three years, I have some sympathy for the shareholders whose confidence in Gavin Darby’s instinct has waned …
Rather than snubbing McCormick’s offer, now might be the right time grab the money and run.