RHM was in talks on Sunday over an acquisition by Premier Foods following a friendly takeover approach valuing the owner of Hovis bread and Mr Kipling cakes at more than £1bn.
A possible deal, which was reported on FT.com on Saturday and could be announced as soon as Monday, would mark the culmination of long-standing discussions between the two companies and would create the UK’s largest food group with annual sales of about £2.5bn.
The combined group would sell food brands eaten by UK households at breakfast, lunch and dinner including Hartley’s jams, Batchelor’s Cup A Soup, Saxa salt, Paxo stuffing and Ambrosia custard.
The two companies are understood to have held informal merger discussions from time to time, with both companies seeing advantages in a combination.
The catalyst for a serious approach by Premier was its £460m July acquisition of Campbell Soup’s UK businesses, which increased the market capitalisation of the group to about £1.3bn, making it the larger of the two companies. RHM’s market capitalisation is £946m.
If a deal is struck, Premier Foods would have to tackle a food category that RHM has found particularly challenging over the past year: bakery products.
RHM’s bread bakeries division accounts for about half of its total sales, with the company claiming to supply about one third of the UK’s daily bread.
But bread profits have become a concern at the group this year as the company has battled with higher wheat prices.
Independent flour miller ADM Milling last month reported that UK bread wheat prices had risen 40 per cent over the previous 12 months, and 15 per cent over the previous three months.
Analysts say that while RHM was able to raise the prices of its premium Hovis brand over the summer to around 94p, it has been having difficulties getting supermarkets to push through further price increases.
In October, RHM said that a “lag” in recovering higher wheat costs had cost it £2m in the first half of the year. It has not outlined the impact for the second half of the year, but analysts say that it could surpass £2m.
A combined company may be able to capitalise on Premier’s strength as a manufacturer of well-known branded products to negotiate for better price increases with supermarkets.
Some two-thirds of Premier’s grocery sales are branded, with one-third made for supermarket brands. Key brands include Quorn meat-free products, Branston pickles and beans, and Loyd Grossman sauces.
RHM had flat profits for the first half of the year, achieved with £15m in cost-cutting.
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