When Gavin Darby joined Premier Foods in February this year he could have been under no illusions as to the size of the task facing him. The firm, one of the UKs largest branded food producers, has been struggling for years under an unsustainable debt burden and high pension liabilities, while its share price has fallen 90% in the last five years. The firm has long been seen as a zombie corporate: able to meet its interest and pension liabilities but unable to significantly reduce its high levels of debt.
It renegotiated its outstanding debt in March last year, gaining a two-and-a-half-year extension and more relaxed covenants on the £1.3 billion ($2 billion) load in return for a £25 million payment to lenders upfront and a commitment to sell £330 million of assets. But it also faces £3.44 billion of pension liabilities and a £535 million deficit in its pension scheme.
Darby replaced Michael Clarke as chief executive, the latter having held the role for a mere 18 months. There is a sense that drastic action is required if the company is to arrest the decline. A rights issue or high yield bond issue would seem to be the answer the firm undertook a highly dilutive rights issue in 2009. Its plans for a £425 million bond issue in 2011 were scuppered by market conditions. But Darby angered many of his 3,000 suppliers in July with a more radical plan for fundraising: a mutual investment programme in which they are required to participate.
We plan to implement a mutual investment programme from the beginning of August 2013, Darby explained in a letter to Premier Foods suppliers seen by Euromoney. This will include our broad supplier base and will require you to make an investment payment to support our growth. In the letter Darby includes the investment payment required of each supplier (understood to be a minimum of £10,000) and requires the recipient to fill in a debit instruction against invoices payable on their account. This mutual investment programme is intended to become an annual process, Darby adds. Earlier in the letter he describes the firms intention to work with a smaller number of strategic suppliers and describes the establishment of the fund as a first step. It is, therefore, pay to play.
|Darby; source: Premier Foods|
It certainly seems disingenuous to describe such a scheme as mutual, and the letter has provoked much anger among Premiers suppliers. Darby has stated that Premier needs to reduce the number of suppliers it works with, and requiring them to stump up considerable amounts of cash in order to do business with the company is one way of achieving that.
It is also a new approach from the firm that could be a sign that a day of reckoning draws closer. There is some sense that the vultures are circling: in June a single buyer understood to be distressed debt specialist Apollo Global Management bought £100 million of Premier Foods loans. In early 2012 the US debt specialist bought a £60 million package of Premier loans reportedly at around 70c on the euro from Irish lender AIB.
Paulson & Co, Warburg Pincus and Franklin Templeton are anchor equity investors in Premier Foods and will be at the sharp end of any dilution following any rights issue, should one occur. In April Paulson & Co sold down its 11.8% stake to 10.8% after having lost a reported £1 million on the investment.
Premier Foods managed to raise £370 million from asset disposals last year and has cut £48 million of costs, with another £20 million of targeted cuts in 2013. It reported decent first quarter results: sales were up 1% to £327 million; total branded sales were up 2.2% to £275 million; 'power brands' (key brands) sales were up 3.3% to £222 million. However, support brands fell 1.9% to £53 million and non-branded sales fell 5% to £52 million.
Despite these steps, the company still faces some seemingly insurmountable hurdles without a debt restructuring. A triennial actuarial review could see the pension deficit rise from £535 million to as much as £900 million, according to analysts at Panmure Gordon. The firm has to pay £22 million of deferred bank fees this year, at the end of which its pension deficit payments holiday expires. Net debt for which refinancing needs to be in place by 2014 will still be £869 million for a company that had a market capitalization of around £190 million and has recurring free cash flow generation of between £40 million and £60 million.
There is a sense that Gavin Darby needs to pull a rabbit out of a hat, but squeezing his suppliers for funds seems to be a not very magical way of going about it.
Premier Foods did not return Euromoney's requests for comment.