Premier woes after Hovis and other big names suffer sales slump

Shares in Britain’s largest food manufacturer slumped yesterday after it revealed well-known brands such as Hovis were fast losing market share and it was having to renegotiate the terms of its debt pile.

Premier Foods, which also owns brands such as Indian foods label Sharwood’s and Batchelor’s soup, said sales volumes had fallen 8 per cent in the three months to 30 September, meaning profits for the current year were likely to be below previous expectations.

It said the decline represents a loss of market share of around 1.9 percentage points in value, or 2.1 per cent by volume.

Hovis saw volumes drop 13.5 per cent in the period, while its Brookes Avana business, which makes own-label ranges for supermarkets, saw sales decline 13.2 per cent after losing a significant pie contract at its site in Leicester.

Premier added that it was holding talks with lenders to prevent it from breaching covenants over its debt which are due to be tested at the end of the year.

The group said it would sell off a number of businesses to focus on eight “power brands” in a bid to drive future growth, as some analysts questioned its viability.

Chief executive Michael Clarke, who took the top post in August, said the company would not meet last year’s profit in the second half as previously expected.

“I am convinced that there are substantial opportunities here but there are also significant challenges that we have to overcome,” he said. “While the current trading performance continues to be disappointing and significantly behind our expectations, we have already identified a number of steps to build a more profitable business.

“These include focusing on eight ‘power brands’, strengthening our sales and marketing and reducing our cost structure.”

He plans to reduce the size of Premier’s portfolio by selling brands outside the eight he wants to concentrate on – Ambrosia, Batchelor’s, Bisto, Hovis, Loyd Grossman, Mr Kipling, Oxo and Sharwood’s. That is expected to produce cost savings above the £20 million target already identified by 2013, but Clarke declined to name the labels he plans to sell.

He said his immediate priority was to conclude discussions with the banks to revise its covenants and put in place refinancing facilities.

Premier’s full-year profit expectations had been between £214m and £232m – but it no longer expects to meet that range. Last year the company made £311m. The overall performance of the group depended on the crucial fourth quarter, when many of Premier’s brands enjoy strong Christmas sales.

The St Albans-based manufacturer also said its net debt would be higher than the £850m forecast for the full year. Premier built up its debts in a buying spree last year that saw it snap up the likes of Hovis owner RHM. It recently moved to alleviate some pressure by selling off its canning business and meat-free division Quorn.

Martin Deboo, analyst at broker Investec Securities, said Premier’s survival was now in question. He added: “To say that all this adds up to a baptism of fire for new chief executive Mike Clarke feels like the understatement of the year. His mettle is going to be strongly tested in the run-up to Christmas.”

Royal Bank of Scotland issued a buy recommendation and 38p share price target for Premier, but said its value depended on a successful renegotiation of its bank debt without having to resort to a rights issue or a debt-for-equity swap.

“Premier Foods’s equity value now largely depends on how negotiations between the company, banks and major shareholders proceed,” it said.

Shares in Premier closed down 42 per cent at 5.8p yesterday.