Premier searches for a buyout rescue

Premier Foods, Britain’s biggest food maker, has finally admitted that it is facing a major funding crisis and is looking for a capital injection, which could see it partner with buyout firms and even a strategic player.

After a quixotic spending spree on buying companies – including the £1.2bn acquisition last year of Mr Kipling owner, RHM – Premier Foods has raked up massive debt of almost £2bn, while its share price has collapsed by 85% since the start of the year.

Having to deal with inflationary commodity prices during 2008 and now deflationary retail price pressures over the coming months in a worsening economic environment, Premier Foods is facing margin pressures that may well see it breach its bank covenants of 4.5x net debt to Ebitda.

As a result, Premier has pushed back its covenant test from the end of December to the end of March by paying a £5m fee, while it looks for a much necessary equity injection of between £580m and £780m to keep its banks at bay.

Premier’s lenders are Barclays Capital, Bayerische Landesbank, BNP Paribas, Rabobank International, Lloyds TSB Bank, and Royal Bank of Scotland.

While private equity players are searching for distressed assets to pick up on the cheap – with senior and mezzanine debt both expensive and hard to get – some analysts believe that they would be unlikely to inject up to £780m of their own equity in Premier, which has a market value hovering just above the £200m mark.

“In our view, anyone planning to make a £580m–£780m equity injection would be better off buying the company at a minimal premium right now and privatising it, rather than giving the turnaround upside to current shareholders,” according to JP Morgan analysts.

Already, Premier has rejected a £250m approach for Mr Kipling by United Biscuits, which is controlled by Blackstone and PAI Partners, because that would not have solved its debt problems.

Indeed, Blackstone has already been mooted as a potential investor in Premier Foods as a whole, as have its private equity peers, Lion Capital, Permira, Alchemy Partners, Bain Capital, and CCMP Capital.

But Premier’s dire situation also does not preclude a rescue by a strategic buyer. Asked if that was a distinct possibility, a source close to the situation said: “I’m not going to comment on that sort of stuff. Look, I think they are focused on, amongst other things, getting an appropriate capital structure in place.”

Meanwhile, Premier continues its early-stage talks “with a number of its investors and certain other parties regarding a possible investment”.