Premier: Third Time's a Charm

A premium this size doesn't come along every day

The time has come for Premier Foods to engage with U.S. spice maker McCormick & Co. about its desired takeover of the U.K. snacks group. McCormick's latest 65 pence-a-share bid proposal, its third approach this year, looks like an acceptable basis on which to start proper talks.

It is hard to see how shares in Premier, which makes Branston pickle and Mr. Kipling cakes, will get to the same level in the foreseeable future if the company stays independent. True, Premier is in recovery mode after a period of extreme share-price weakness -- it recently raised its forecast rate of sales growth in the medium term to as much as 4 percent from as little as 1 percent.

Back to the Future

Premier's shares soared to levels not seen since 2014 once McCormick dangled a huge takeover premium

Source: Bloomberg

Still, McCormick's offer captures this. It is a premium of 106 percent over Premier's undisturbed price of 31.5 pence and nearly 40 percent over Premier's highest share price last year.

The offer implies an enterprise value of 1.5 billion pounds ($2.2 billion), McCormick said, a decent 10 times expected Ebitda. While other food groups trade on higher multiples, they have more financial flexibility to fund future growth -- and more visible prospects -- than debt-laden Premier.

Not Quite Premier

McCormick's below-average valuation for Premier Foods reflects its less-certain prospects

Source: Bloomberg

The revised proposal certainly vindicates Premier's rejection of McCormick's previous two unsolicited approaches. The group dismissed the last of these, worth 60 pence a share, as "significantly undervaluing" the business. The 8 percent bump provides reasonable grounds for changing tack.

Opening up the books to a bidder can be seen as giving up the fight. There is also the risk that McCormick doesn't like what it sees and walks away, leaving Premier in a tight spot.

Premier could of course sit tight ahead of the April 20 deadline for firm bids, set by the U.K. takeover regulator. But if no other buyer emerges in that time, McCormick's negotiating hand will only strengthen. That is a plausible scenario. Japan's Nissin Foods recently has amassed a 19.9 percent stake in Premier. This will deter other bidders, and may explain why the Premier share price is currently hovering below the value of McCormick's bid.

Now set this against the chance to extract an even higher price from McCormick, justified by what it might discover through a good look at the business -- and a bit of arm-twisting from Premier's board.

Premier will need to come up with an incredibly strong defense if it is going to issue another rejection.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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