Premier Foods seeks pension fund deal to slash liabilities

Premier Foods is in talks with trustees of its pension fund about a deal to reduce its liabilities as part of a corporate restructuring which the heavily-indebted company said on Monday could involve a rights issue next year.

Shares in Premier fell by as much as 12 per cent on Monday before recovering some losses to close 4 per cent lower at 125.50p, after the maker of Oxo stock cubes, Mr Kipling cakes and Hovis bread confirmed for the first time: “the possibility of a rights issue.”

The last rights issue in 2009 was heavily dilutive but Premier’s financial position now is stronger after selling assets and cutting costs that has led to healthier trading. It was also granted a breathing space by its lenders in 2012 when they agreed a refinancing that lasts until June 2016.

However, new financing would need to be in place by late 2014 for auditors to sign off on the 2014 accounts and most analysts expect a deal to be struck some time between March and the autumn next year.

Premier said it had not made a final decision on the form of the capital restructuring but analysts close to the company believe it needs at least £300m in new equity, as well as a deal with pension trustees and refinancing of a proportion of its debt in the bond market.

The company also aims to strike a deal with lenders to reduce their number from 28 to a core group of about five.

Premier had £890m of net debt at the end of June. It also has a pension deficit of £394.7m and pension liabilities of £3.65bn. The company’s market value is just £313m.

A deal with the trustees is regarded as the first step in the capital restructuring. The company was granted a two-year grace period in 2012 by its pension fund owner to defer deficit contributions but this runs out next month.

One person close to the company said relations with the trustees were “cordial and constructive”.

Gavin Darby, chief executive since February, has cut costs and is looking for a partner to invest in its problematic bread division, including Hovis.

Ondra Partners is conducting an auction and has drawn up a shortlist of potential investors, dominated by private equity groups, including PAI Partners and Sun Capital.

While Premier’s grocery business, which includes Ambrosia, “generates impressive earnings before interest and tax returns of over 19 per cent, Bread is modestly lossmaking at the ebit level,” according to analysts at Investec.

Hovis lies at the root of Premier’s financial problems, after its 2007 highly leveraged acquisition of RHM, the previous owner of the brand.

Premier has since gone through a painful corporate restructuring and several changes of top management.