MergerMarket
* Shareholders broadly supportive of management
* Industry comparables suggest valuation above 80p/share
Premier Foods [LON:PFD] has a strong rationale to push for a higher offer from McCormick & Company [NYSE:MKC], but should get a deal done, two minority shareholders told this news service.
McCormick has a 65p/share all-cash possible offer on the table, and negotiations are underway this week between the two parties, a Premier spokesperson confirmed.
McCormick first approached Premier at 52p/share on 12 February, and returned at 60p/share on 14 March, but Premier refused to entertain these initial approaches, as reported.
Even the 65p/share offer currently under discussion does not really capture Premier’s upside, one shareholder said. The company has a solid underlying business, and a capital raise and new management have improved its prospects since 2013, he said. Having now posted two consecutive quarters of growth, management’s labours are beginning to pay off, he added.
With Premier’s troubled history, shareholders should want to engage with McCormick, said an independent sector advisor. However, given its improved sales outlook, it makes sense for the board to negotiate for more than the proposed 65p/share offer, he said.
Premier posted GBP 144m EBITDA in the year ending 21 April 2015, and GBP 150m is a reasonable near-term expectation, said the shareholder. The standard EV/EBITDA ratio in the consumer food space is about 13x, he said. Discounting Premier’s ratio to account for some weaknesses, such as the fact that its turnaround has not yet been properly realised, he allowed for an 11x multiple.
An 11x multiple would imply a GBP 1.76bn EV, from which the shareholder subtracted GBP 1.01bn to account for corporate debt and pension shortfalls; this, he said, leaves GBP 708m in equity value and suggests a fair price of 86p/share.
A reasonable multiple for Premier would be around 10x-12x, said a second shareholder, who added he would be happy with an all-cash offer from McCormick above 70p/share, and would hope for 80p/share. The proposed Premier/McCormick joint operation presents good synergies, so he would not turn down a cash-and-shares mix, but he would prefer all cash, he said.
Supporting the shareholders’ valuations, the average European consumer food merger in the last five years was completed at an average EV/EBITDA multiple of 12.1x, according to Dealreporter analytics.
On the other hand, the average share price premium of these deals was 43.96%, the analytics show, while a 65p/share offer for Premier would represent a 106.35% premium over the company’s undisturbed share price.
If McCormick were to walk away, the first shareholder said he would not press for a shareholder meeting. However, the second shareholder said he expects the board to get a deal done with McCormick, and would reserve judgment on management’s performance until after he sees what kind of offer Premier ultimately accepts or rejects.
A spokesperson for McCormick declined to comment.