Premier Foods is to sell a 40% chunk of itself to private equity firms. The company behind some of the UK’s best known branded foods has decided to raise capital to pay down some of its hefty debt load by a share placing offered to private equity firms.
The company will simultaneously launch a rights issue to existing shareholders, in a bid to raise a total of £300m.
The news indicates that Premier has opted to avoid breaching its loan terms through raising external equity capital.
The market responded well with shares rising by an initial 8% before falling by 4% to sit at 33.5p perhaps as existing shareholders worry about a potential dilution of their stock.
Premier, which is due to issue a trading update tomorrow, has traded strongly despite the consumer downturn. In the four months to October 2008, sales rose by 9%.
“Premier Foods is a sound company in terms of being a strongly cash generative business which has issued a run of reassuring trading updates. There is potential upside value on the table which could afford a substantial amount of dilution,” commented Martin Deboo, an analyst from Investec Securities.
However, the company has been strangled by the £1.81bn of debt it carries on its balance sheet compared to a market capitalisation of just £270m after its shares have lost 85% of their value over the last year.
Private equity firms including Blackstone, Lion Capital, Bain Capital and Permira are understood to have been sent information memorandums about buying into the share placing by Goldman Sachs.
While all of the above bidders have experience in the food manufacturing industry, not all of them are used to owning minority stakes in publicly-listed companies.
Blackstone and Permira both do, 4.5% in Deutsche Telecom and 14% in soft drinks maker Britvic respectively. Both investments were made in 2006 with Permira’s stake originally seen as a precursor to a possible takeover bid.
Neither of these investments will have made close to the returns the two firms target with both share prices nudging around the same points today as they were when the shareholdings were acquired.
However, with Premier Foods the situation is quite different. Up for grabs is a significant stake in a company which is regarded as being well-placed to handle the downturn and with a share price that has been heavily-punished for the company’s debt position.
Premier Foods needs an investor. A deal between it and a buyout firm could be a healthy arrangement for both parties giving private equity the chance to invest some of its mammoth war chest despite the lack of debt available.
Should management welcome private equity’s involvement, a strong relationship could develop and a new model of successful private equity investment in listed stocks might emerge.
If Premier Foods’ share price was to rise by as much as it has fallen, the private equity firm would be on track to deliver strong returns but the deal may frighten LPs – without leverage or management control will the private equity firm be doing what it set out to do? An investment now may be the first step to an eventual takeover of the business.
Premier hopes that if it raises cash from a rights issue and private equity investment and uses that money to pay down its debt, the banks will agree to relax its interest-cover covenant.
Premier agreed with lenders Lloyds TSB and Royal Bank of Scotland to defer a test of its banking covenants from December 31 until March 31. A deal must be secured by then.
Source: Thomson Merger News