Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

McCormick's decision to leave Premier Foods on the shelf means its jilted target has much to prove.

Undercooked -- Then Burned
Premier Foods wasn't viewed as a takeover target until McCormick's interest surfaced in March
Source: Bloomberg

Premier thinks it's worth more than the 537 million pounds ($764 million) its U.S. suitor was prepared to offer. But after looking at Premier's books, McCormick seems to have become less sure that the maker of Mr. Kipling's cakes is worth even that.

Before McCormick's interest surfaced last month, Premier had a bite-sized market value of 246 million pounds, near a five-year low. Investors didn't view it as a takeover target. After all, the cost of the business zooms up to more than 1 billion pounds when Premier's debt and colossal pension liabilities are added on. Only a large food group could afford it, yet Premier's rag-bag of second-tier brands wouldn't be attractive to such a buyer. That logic has been vindicated.

Snack-Sized Target
Premier Foods' market value is small -- but its pension liabilities inflate its enterprise value
Source: Bloomberg

McCormick says disagreement on price is behind the termination of talks. It's an odd explanation in the circumstances.

Premier's rejection of McCormick's most recent 65 pence-a-share proposal said this merely "undervalued" the business, implying the smallest of sweeteners would secure its approval. For its part, McCormick could have dealt with rejection by formalizing its existing proposal as a hostile bid. Many Premier shareholders wanted a deal.

So why did McCormick change its mind? Perhaps taking on substantial U.K. pension risk was too daunting -- although the issue was hardly a secret. Alternatively, McCormick couldn't find a way to buy out or work with Nissin Foods, the Japanese peer that recently signed a strategic alliance with Premier and took a 20 percent stake. Or maybe McCormick has a better-value acquisition in mind -- M&A is part of its stated strategy.

When public M&A falls apart, both sides come away damaged to a degree. McCormick's future targets may now be more wary of engaging with the company. The group may regret being quite so public and aggressive in its tactics. Even so, it retains plenty of credibility as a well-funded and serious bidder.

Premier will find it much harder to return to business as usual. The process has exposed that the board hasn't enjoyed the full backing of its shareholders, including Paulson, the U.S. hedge fund.

Premier didn't think McCormick's offer was high enough, but still felt compelled to open the books because some shareholders were urging it to explore a deal. Normally a board wouldn't allow due diligence to start before receiving what it deemed an acceptable proposal, and could assume investors would support it firmly.

It also raised hopes of a deal last week when it publicly stated talks with McCormick had been constructive.

Above all, the board needs to justify its view that the business is worth more than 65 pence a share on a standalone basis.  This seems largely based on the Nissin tie-up, which now looks like a poison pill that benefits the Japanese company and disadvantages other shareholders. 

Let's give Premier a couple of years to get there. The forthcoming actuarial review of its pension deficit may help if it shows the burden is falling. Even so it will be a stretch to deliver share price growth of 25 percent this year and next.

Premier wanted to have its cake. Now it's got to eat it.

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

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