£350m rights issue for Premier Foods
Premier Foods is putting the finishing touches to a £750m-plus deal likely to be announced this week that, if successful, would amount to a radical turnround for a company whose debts brought it to the brink of collapse during the recession.
The maker of some of the UK’s best known food brands, including Hovis bread, Oxo stock cubes and Mr Kipling cakes, is expected to announce a rights issue of just over £350m – more than its stock market value of £345m.
It is also preparing a corporate bond issue of about £400m to help tackle its net debt, which stood at £890m at the end of June 2013.
The balance sheet restructuring is aimed at securing an investment grade rating by slashing the group’s high leverage.
Net debt is estimated by analysts to have fallen to £860m at the end of last year, which is about 5 times earnings before interest, tax, depreciation and amortisation. This would need to drop to 3 times for an investment grade rating.
Premier is also expected to announce a deal with pension trustees over its £395m pension deficit. The group, which has pension liabilities of £3.65bn, is close to securing an agreement to reschedule its payments and make reduced contributions over the next few years.
Shares in Premier have risen 57 per cent over the past 12 months on expectation of a turnround and re-rating after the appointment of Gavin Darby as chief executive a year ago.
The former head of Cable & Wireless Worldwide and Coca-Cola executive, pledged to turn Premier into a “normal” company. It was seen as a Great British corporate disaster in the late 2000s when it overstretched itself through a series of highly-leveraged acquisitions.
The restructuring has been made easier by the buoyancy of financial markets and a greater risk appetite by investors. The group’s two biggest shareholders are Warburg Pincus and Paulson, which between them hold a 28 per cent stake. Franklin Resources and Standard Life hold another 13 per cent.
It also follows January’s deal to hive off the Hovis bread business, which struggled to break even, into a joint venture. US private equity outfit Gores Group agreed to take a controlling 51 per cent stake in Hovis for £30m with Premier retaining 49 per cent.
That made it easier to turn to shareholders for new equity on the basis of Premier’s grocery business, which enjoys operating profit margins of 17-18 per cent against 1 per cent for bread.
Premier declined to comment.