Premier Foods bidder McCormick evaluating finer points of pension scheme
* Size of pension still prime risk
* Non-public information not seen as material by independent consultant
McCormick’s [LON:MKC] due diligence on Premier Foods’ [LON:PFD] pension scheme is down to the scheme’s “framework,” a person briefed and an independent pensions consultant said.
McCormick announced last week that the target's pension scheme, along with current trading and material contracts, was one of three outstanding concerns for its 65p per share possible offer.
The scheme’s “framework and how it is set up” remains the only unknown on pensions for the bidder, said the person briefed. As the two companies hold negotiations, McCormick is sifting through the finer points of the scheme’s non-public details, said the person briefed and a source close to the deal.
The only aspects of Premier’s pensions that would not yet be publicly known are the legal-trust deed and an actuarial valuation of the scheme, said pensions consultant John Ralfe.
The implications of the legal-trust deed would be marginal for McCormick’s picture of the pension scheme, he said. The actuarial valuation could result in slightly more precise numbers but would not have a profound effect, said Ralfe. If McCormick had not been put off by what it already knows of Premier’s pensions, McCormick would be unlikely to change its mind on bidding for the company, Ralfe said.
While there is little that McCormick does not already know about Premier’s pensions, these issues could give them an excuse to walk away if negotiations do not turn in their favour before the put-up-or-shut-up deadline on 21 April, he said.
The real risk to a deal is the size of Premier’s pension liability, Ralfe said. Premier has a massive underlying pension of GBP 4bn, or 10 times its undisturbed market cap, Ralfe noted. McCormick is “putting their head above the parapet” in taking on Premier’s pensions, he added.
Rising interest rates could slightly mitigate Premier’s GBP 390m pension deficit — the net present value of its pension scheme’s projected shortfall — in coming years, an independent sector advisor suggested. Still, Ralfe noted that this consideration should pale next to the size of the pension scheme relative to Premier’s business itself, said Ralfe.
A minority Premier shareholder also agreed McCormick’s offer was surprising given the sheer mass of the pension scheme. The capital structure of the company prevents a purely financial bidder from mounting a bid, as opposed to an industry peer seeking commercial synergies, admitted a second Premier minority shareholder.
McCormick has noted the anxiety among Premier shareholders, said the source. This news service previously reported that Premier investors nevertheless anticipate a final bid well above the current bid.
McCormick and Premier Foods did not respond to request for comment.