Premier Foods rejects approach from McCormick and announces co-operation agreement with Nissin Foods

London / UK. (pf) The Board of British Premier Foods PLC confirms that it received an unsolicited, non-binding and highly conditional approach from McCormick + Company Inc. on 12 February 2016 regarding a possible offer for the entire issued, and to be issued, ordinary share capital of the Company at an indicative price of 52 Pence in cash per Premier share. This approach was rejected on the basis that it significantly undervalued the Company and its prospects. The Board received a subsequent approach on 14 March 2016 with a revised possible offer for the entire issued, and to be issued, ordinary share capital of the Company at an indicative price of 60 Pence in cash (the «Indicative Price») per Premier share (the «Proposal»). This approach has also been rejected on the basis that it significantly undervalues the Company and its prospects, and therefore the Board does not consider that the Proposal would be in the best interests of Premier and its shareholders.

• McCormick approach significantly undervalues Premier’s growth prospects and represents an insufficient premium to Premier’s enterprise value
• Investment-led strategy starting to deliver results
• New strategic initiatives expected to accelerate growth trajectory
• Co-operation agreement with Nissin to create long-term value through strategic partnership of brands, markets and technology
• Update on Hovis Holdings Limited and Knighton Foods Limited joint ventures
• Board’s expectations of Trading Profit for full year remain unchanged

Commenting on the approach David Beever, Chairman of Premier, said: «McCormick’s Proposal represents an attempt to capture the upside value embedded in Premier’s business that rightfully belongs to Premier’s shareholders. The Proposal fails to recognise the value of Premier’s performance to date and prospects for the future, including the strategic plans we have to accelerate growth. McCormick’s Proposal significantly undervalues the business and the Board has unanimously decided to reject it».

McCormick’s Proposal represents an insufficient premium to Premier’s value

Whilst the price per share indicated in McCormick’s Proposal is significantly above the current share price, due to Premier’s specific capital structure, the Board considers that shareholders should evaluate the premium implicit in McCormick’s Proposal with reference to Premier’s enterprise value (which includes allowances for financial debt and ongoing pension obligations). On this basis, the offer represents an insufficient premium which, in the Board’s view, does not fairly reflect the benefit to McCormick of gaining control of Premier.

Furthermore, the Board does not believe that the multiple of enterprise value to Ebitda implied in McCormick’s Proposal fairly reflects the Company’s growth prospects. The Board considers that the Net Present Value of the future cash flows expected to arise from the Company’s growth plans outlined below would imply a price per share significantly above the Indicative Price.

In accordance with Rule 2.6(a) of Takeover Code, McCormick is required, by not later than 17:00 on 20 April 2016, either to announce a firm intention to make an offer for the Company in accordance with Rule 2.7 of the Code or announce that it does not intend to make an offer, in which case the announcement will be treated as a statement to which Rule 2.8 of the Code applies. This deadline can be extended with the consent of the Takeover Panel in accordance with Rule 2.6(c) of the Code.

There can be no certainty that any offer will be made nor the terms on which any such offer might be made. Premier shareholders are strongly advised to take no action in respect of the Proposal. This announcement is being made by Premier without the prior agreement or approval of McCormick.

Investment-led strategy starting to deliver results

The Board sees a strong future for an independent Premier and believes that the foundations have been laid for significant growth and shareholder value creation.

Premier has a strong and valuable portfolio of market leading brands, extensive distribution across key retail channels, a well-invested manufacturing base and strong operational cash flows.

Under the strong leadership of CEO, Gavin Darby, Premier has assembled a highly experienced management team that has successfully restructured the business and put in place an investment-led growth strategy that is already starting to deliver results.

• Since 2014, the Company has more than doubled its rate of new product innovation, launching a wide range of new products, packaging formats and line extensions to meet changing consumer trends.
• Premier expects to increase significantly its investment in consumer marketing from approximately £25 million in the 2013/2014 financial year to approximately £36 million in the 2015/2016 financial year.
• The investments behind some of the biggest brands including Mr. Kipling, Cadbury cakes, Oxo and Bisto, delivered gains in volume, value, market share and household penetration in 20151.
• The Company is driving growth in channels beyond the supermarkets, including discounters, online and international.

The Board believes that, by extending this strategy to its other brands, the Company will deliver further growth in the future. The Board further considers that the step-up over the last two years of the Company’s investment in brand marketing and product innovation, against the background of a challenging UK food retail environment, means that the Company is at an inflection point in terms of its longer-term growth prospects.

New strategic initiatives to accelerate growth

The Company has additionally identified a number of new strategic initiatives to help accelerate growth across its three Business Units of Grocery, Sweet Treats and International. Whilst these initiatives are expected to incur initial upfront investment of 2 to four million GBP in the full year 2016/2017, the Company is now raising its sales growth guidance for the medium term from 1 to 2 percent to 2 to 4 percent.

The new initiatives will leverage the Company’s existing platforms, infrastructure and brand presence to expand further into new formats, channels and markets:

• In Sweet Treats, we plan to build on the successful trial of our Cake-To-Go range of Mr. Kipling twin pack slices and Cadbury mini roll twin pack by accelerating growth of our brands in broader convenience channels; to do so, we will capitalise on our manufacturing investments, innovation expertise and dedicated new team.
• In Grocery, we intend to extend our strong brands into premium areas within the chilled grocery sector in the sweet and savoury segments, including product ranges to meet consumers’ growing health-consciousness.
• In International, we plan to leverage the investment we have already made in hiring an experienced team to step-change the size of our international business. Our focus will be on accelerating the expansion of our cake brands in the US and other geographies using our differentiated offering, unique formats and packaging. Initial store trials have demonstrated the potential for future growth in these markets.

Cooperation agreement with Nissin Foods Holdings

Over recent years, Premier has discussed a number of potential strategic opportunities with Nissin. The Board has now agreed to enter into a co-operation agreement with Nissin (the «Co-operation Agreement»), conditional upon: (i) Premier no longer being subject to an offer period under the Code; and (ii) no third party having, by the date on which such offer period expires, announced that any offer for Premier has become or been declared unconditional as to acceptances or that a scheme of arrangement has become effective.

With annual revenues of around 3.8 billion USD and operating profit of around 216 million USD, Nissin, which invented the world’s first instant noodles in 1958, operates in 19 different countries, spanning Asia Pacific, the Americas, Europe, Middle East and Africa. It is a global leader in instant noodles holding the number one or two positions in key markets, including Japan, the United States and Brazil and has a growing presence in chilled and frozen foods, cereal-based confectionery and yoghurt beverages in Japan. Nissin’s presence in Europe includes Hungary, Germany and Spain, with brands such as Cup Noodles, Soba and Top Ramen. It also benefits from a state-of-the-art global research and innovation centre in Japan that develops more than a thousand new products that are distributed around the globe every year and has significant expertise in starch technologies, sodium reduction and production techniques.

The new strategic partnership has the potential for significant long-term value creation for both organisations through strategic co-operation in areas which may include:

• Providing Premier with access to Nissin’s innovative products and formats to distribute in the UK market under either Nissin’s or Premier’s brands, such as Batchelors.
• Enabling Premier to benefit from Nissin’s international scale to accelerate the distribution of Premier’s products in key overseas markets.
• Sharing of Nissin’s significant intellectual property, innovation and technical know-how to develop new products.
• Creating opportunities for both companies to leverage their joint manufacturing capabilities and infrastructure.
• Facilitating sharing of expertise and best practice through appropriate secondments of personnel.

Premier is also considering, in the context of the proposed commercial collaboration envisaged by the Co-operation Agreement, entering into a conditional Relationship Agreement with Nissin on customary terms and consistent with market practice (including a right to appoint a non-executive director to the Board of Premier for so long as the relevant party holds an interest in shares representing 15 per cent. or more of the ordinary issued share capital of Premier) if Nissin were to acquire a substantial shareholding in Premier. In any event, under the terms of the Co-operation Agreement, Nissin has unconditionally confirmed that it does not intend to make any offer (as defined by the Code) for Premier for a period of at least six months from the date hereof in accordance with, and subject to, the provisions of Rule 2.8 of the Code (although, subject to those provisions, Nissin may otherwise be able to acquire shares in Premier). As a result of such confirmation and this statement, Nissin will be bound by the restrictions contained in Rule 2.8 of the Code. In summary, these restrictions prohibit Nissin from making an offer for Premier (or from acquiring further shares that would give rise to an obligation to make an offer for Premier) within the six-month period following the date of this announcement, other than in the circumstances described in Note 2 to Rule 2.8 of the Code (that is, with the agreement of Premier’s board, if a third party announces a firm intention to make an offer for Premier, if Premier announces a “whitewash” proposal or reverse takeover, or if the Takeover Panel determines that there has been a material change of circumstances).

Gavin Darby, Chief Executive Officer of Premier said: «This is an exceptional opportunity for us to gain a major strategic partner which understands our business and supports our growth ambitions. We look forward to working with Nissin to explore ways our two businesses can co-operate to better serve both our customers and our shareholders».

Update on Results for 2015/2016

The Company expects to report its Preliminary Results for the 52 weeks ending 02 April 2016 on 17 May 2016. The Board’s unpublished expectations for Trading Profit for this 52-week period remain unchanged.

As part of its year-end procedures, the Company has been reviewing the carrying value and status of its two associate companies, Hovis Holdings Limited and Knighton Foods Limited. The Company currently estimates that its share of loss in associates for the full year 2015/2016 will be approximately 18 million GBP. This charge reflects certain one-off costs as well as ongoing trading. The share of loss in associates was previously disclosed as 7 million GBP for the 26 weeks to 03 October 2015. In addition to the above, the Company expects to write-off fully its remaining investment in Hovis of approximately 8 million GBP. These items do not reflect a cash outflow for Premier.

The Knighton joint venture was established in 2014 to combine certain Premier dry powder manufacturing facilities with those of a third party, Specialty Powders Holding Limited. This agreement enabled certain manufacturing assets to transfer from the Knighton site to Premier’s site at Ashford, Kent, which delivered significant efficiencies as expected. The joint venture brought additional third-party volume to the Knighton site, which also remains a critical supplier to Premier (which takes about 40 percent of Knighton’s output).

Premier has now concluded that maintaining its interest in Knighton in the form of a joint venture is no longer in the Company’s best interests. It is therefore in negotiation with Specialty Powders to acquire the 51 percent of Knighton that it does not currently own (for de minimis consideration). Such an acquisition would increase Premier’s reported sales for 2016/2017 by approximately 35 million GBP, which is approximately 19 million GBP greater than the business originally contributed by Premier to the joint venture on its creation in June 2014. The Knighton business is substantially non-branded and, on full consolidation, is expected to have a broadly neutral impact on Ebitda.

Premier expects to gain control (as defined under IFRS-10) of Knighton before the end of the current financial year. On acquiring such control, Premier would be obliged to consolidate Knighton’s net debt of approximately 11 million GBP which is currently financed by a third-party asset backed lending programme. Premier would seek to refinance this facility if the acquisition were to proceed. Premier would also revalue its investment in Knighton, which is likely to result in additional one-off charges in 2015/2016 of up to 10 million GBP.