Shares in Premier Foods (LSE: PFD) plummeted 31% as soon as the markets opened on Wednesday morning, though they’ve settled at 42p (down 26%) at the time of writing. But what’s it all about?
Well, the share price initially shot up on 23 March, gaining 71% on the day to 53.75p, after the company revealed it had “received an unsolicited, non-binding and highly conditional approach” from McCormick & Company on 12 February. It wasn’t a formal offer, but an indicative price of 52p per share had initially been suggested. That was quickly rejected by the board of Premier Foods, but was followed on 14 March by an updated approach with an indicative price of 60p.
The board again rejected it, saying that it “significantly undervalues Premier’s growth prospects and represents an insufficient premium to Premier’s enterprise value“. With the shares trading at a tiny P/E of under five prior to the approach, and with a 60p offer lifting it only as high as 7.2 based on expectations for the year to March 2016, I can certainly understand Premier’s underwhelmed reaction. However, it did say that should a further revised offer be made, it would give it “…careful consideration and evaluate its merits“.
All over
That offer was made a week later, at 65p per share, which the Premier board said “continues to undervalue Premier and its prospects“, but told us it was prepared to get together with McCormick for a bit of a chin-wag to see if a recommendable offer could be forthcoming.
But that’s all history now, as McCormick has pulled out and won’t be making an offer, triggering today’s share price collapse. The shares, however, are still 35% above the initial pre-offer price, so what does this all say about Premier Foods as an investment?
It looks to me as though McCormick really was trying to do a bit of bottom-fishing and get hold of Premier Foods on the cheap. The shares had been in a rut for years, with EPS plunging from 27.51p in 2010 to just 7.16p in 2015. But it looks as if the turnaround is happening as Premier’s restructuring starts to take effect, with a 16% EPS recovery indicated for the year just ended and single-digit rises pencilled-in for the next two years.
Recovery
The problems at Premier, the maker of many household brands including Bisto, Mr Kipling and Sharwoods, came about by over-enthusiastic expansion that led to burgeoning debt. At the interim stage in October, net debt stood at £585.3m (though it was expected to “reduce significantly” in the second half). The firm’s problematic pension deficit adds weight to its woes too, but that was down by £32.8m to £211.8m after the first half.
While debt levels remain so high (the interim figure was well above the company’s market cap of around £350m at the current share price) there’s still some sizeable risk for Premier and I can see an erratic share price in the near future. But with fundamentals starting to look good, and with McCormick having seen a bargain price at 65p per share, I’m cautiously optimistic for the future of Premier Foods.
