The decision by American food giant McCormick to pull the plug on its 65p per share offer for struggling Premier Foods (LSE: PFD) sent shares plummeting 24% on Wednesday. With this bumper offer off the table, where should investors expect Premier Foods to go from here?
Management’s first concern remains addressing the mountain of debt the company racked up in the early 2000s on a multibillion pound acquisition spree. A major restructuring effort in 2014, followed by significant asset sales has brought net debt down to £585m as of the last reporting period. However, this is still 3.9 times EBITDA, which is very worrying. The company also has a gaping £390m hole in its pension scheme that requires £185m in payments over the next four years alone.
Although current management should be commended for restructuring the company’s mess of a capital structure, significant cash will still be flowing out the door to creditors over the coming years. Interest payments for the full year are expected to be £45m. This is a large sum for a company that only sold £341m of goods in the past half year.
It may be difficult to look past these balance sheet issues, but the company’s underlying business is showing signs of life. Sales rose 0.4% year on year in the past half, which is low, but not that bad when taking into account the outlook for the grocery sector as a whole. However, with low growth prospects and hundreds of millions of pounds in debt and pension liabilities, I wouldn’t be expecting massive shareholder returns anytime soon.
Bad news flowing
The past few months have been even rougher on Genel Energy (LSE: GENL). The small oil producer, chaired by former BP CEO Tony Hayward, was forced to issue two downgrades to its reserves since the beginning of the year. And this hasn’t been the only bad news for Genel.
The company, which drills in Iraqi Kurdistan, has been caught in the middle of a three-way spat between the Iraqi central government, Turkey, and Iraqi Kurdistan that saw the Kurds unable to both fund their government and pay foreign oil and gas companies. However, Genel has finally found some of the roughly $400m owed to it delivered over the past months as major trading houses have begun to pay the Kurds directly for oil deliveries.
Even if this is the beginning of the end to payment problems, Genel faces an uphill slog going forward. The downgrade in proven and probable reserves at its Taq Taq field alone resulted in a $1bn writedown. Genel’s fields also require considerable investment to continue pumping at the same level, not to mention the frequent interruption of pipelines taking Kurdish oil and gas outside the region. While the company has a very healthy balance sheet, the combined issues of low oil prices, a fraught political situation and worsening reserves are enough for me to steer clear of Genel for the time being.
