Uniq is trading well, but faces a £560 million pension problem.
When is a business not a business? When it's a gigantic pension deficit with a company tacked on...
A simple business
Uniq (LSE: UNIQ) has been making chilled convenience foods for over 81 years. Based in Gerrards Cross, the firm employs 2,200 people in four sites across the UK, making own-label and branded sandwiches, wraps, prepared salads and desserts. In addition, it's the UK's largest producer of cottage cheese.
Uniq counts among its clients Marks & Spencer (LSE: MKS) and other major supermarkets, Cadbury and leading European airlines. It makes over one million sandwiches and wraps each week and, in total, has over 100 products in its prepared-food portfolio. Thus, almost all of us will have eaten a Uniq product at some point.
Tough times
Like many companies large and small, Uniq had a torrid time during the credit crunch. At the start of 2008, its share price was hovering just below £2. By 19 December 2008, it had plunged almost 99% to a low of 2.4p.
Crushed by high debts and faltering revenues, the company was all but on its knees. Nevertheless, things did improve and its share price bounced back. Indeed, it reached an intraday high of 47.25p on 24 September last year, from which it has declined to 10.75p as I write.
Decent results
On Thursday morning, Uniq released its latest half-year results to 30 June 2010. Here are the highlights:
- Revenue (from continuing operations) up 11% to £156.3 million.
- Loss before tax down 31% to £8.6 million.
- Profit (after discontinued operations and tax) of £27.5 million, versus a loss of £14.3 million previously.
Uniq underwent life-saving surgery in 2009, consolidating three sites into two and pruning its head-office expenses. In addition, it transformed itself from a European business to a UK-only firm by disposing of its German and Polish businesses for £42.6 million in cash.
At the mid-year point, Uniq had net cash of £18.2 million, versus its market cap of £12.3 million. In effect, the business itself is 'in the price' for free. However, there is one huge fly in Uniq's ointment...
One almighty problem
I think that Uniq's fundamental problem is shown by the fact that it mentions the word 'pension' 71 times in its latest trading update.
In common with many firms (including these nine FTSE 100 firms), Uniq has a large pension deficit. The company has pledged £97.4 million -- around eight times its market cap -- in a secure account, which it must hand over to its pension Trustee by 31 March 2016.
However, had Uniq's pension scheme been wound up on 31 December 2009, the total deficit would be a staggering £560 million, which is close to 50 times the value of Uniq's equity. Hence, the company has provided the Pensions Regulator with a proposal for a long-term framework to eliminate this deficit.
Regulator says no
Alas, earlier this week, Uniq informed the market that the Pensions Regulator "has stated that the Pension Framework, as currently constituted, does not meet all of its criteria for clearance." In other words, the regulator rejected Uniq's proposals, so more dialogue is necessary. The company "...anticipate[s] that this will take some time to resolve."
In effect, Uniq is in a state of financial limbo. If it cannot pump sufficient contributions into its ailing pension scheme, then the Trustee can wind up the scheme, making the group no longer a going concern and causing the winding-up of the company.
So, it's far from 'business as usual' at Uniq. Its long-term survival depends on delicate negotiations with both its pension Trustee and the Pensions Regulator. Were these to fail, then so too does Uniq. Then again, the interests of Uniq's pension members are best served by the support of a profitable and growing business, so the other parties also need to tread carefully.
To be frank, Uniq has the devil's own job in trying to conquer its pension Goliath. One possible outcome is that Uniq be recapitalised, via funding from existing shareholders or external providers, perhaps in order to provide a one-off final payment to the pension scheme.
Hence, a major capital-raising exercise could be on the cards so as to bail out its largest secured creditor. Were this to happen, then very little value would remain for shareholders. This explains the 29% drop in Uniq's share price when its pension proposals were rejected.
One for the brave only then. For the rest of us, it's another reminder to check for pension liabilities whenever looking at any investment, particularly one that looks cheap at first glance.
More from Cliff D'Arcy:
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