Premier Foods announces innovative joint venture as part of ongoing strategy to maximise value from Grocery infrastructure

Premier Foods today announces that, in line with its strategy to maximise value and efficiencies from its Grocery infrastructure, it has reached a conditional agreement with Specialty Powders Holding Limited (“Specialty Powders”) on a stand-alone joint venture to process and pack powdered beverages and desserts at Premier Foods’ Knighton facility in Staffordshire.

The new joint venture, to be named Knighton Foods, will combine dry powders manufacturing capabilities and assets from both parties at the Knighton site enabling cost synergies and scale efficiencies from greater utilisation of the facility. The agreement will also enable the transfer of two production lines from Knighton to Premier Foods’ manufacturing plant in Ashford, Kent, resulting in significant further efficiencies in Premier Foods’ broader Grocery manufacturing infrastructure.

Commenting on the agreement, Gavin Darby, Chief Executive Officer of Premier Foods said: “This innovative agreement will help to improve the efficiency of Premier’s Grocery infrastructure and, at the same time, allows us to benefit from a dedicated team with expertise that can support our powdered beverages and desserts business. I’m delighted that, in Specialty Powders, we’ve found a highly successful, entrepreneurial partner who is committed to growing the combined business. This is a very positive development both for Premier Foods and for our employees at Knighton.”

Mike Kirby, Majority Shareholder and Group Managing Director of Specialty Powders, said: “This is a fantastic opportunity for both parties. Knighton Foods will have a strong focus on dry powder products with the ability to invest in new processes, products and packaging formats. Our combined technical expertise and manufacturing capabilities will ensure that we continue to deliver high quality products for our customers and consumers, and enable us to develop a successful, broad-based powder processing and packing business for the future.”

Under the terms of the agreement, Specialty Powders will contribute its wholly-owned businesses, Phoenix Foods and Agglomeration Technology, to the joint venture, in consideration for a 51% controlling stake and a loan from the joint venture to repay its existing debt. Premier Foods will contribute the Knighton site and assets (other than the two production lines that will be transferred to Premier Foods’ site in Ashford) to the joint venture, together with its private label and business-to-business sales of powdered beverages and desserts, in consideration for a 49% stake in the joint venture and a promissory note of a principal amount equal to the loan to Specialty Powders. Premier Foods will retain the substantial majority of its branded sales currently made at Knighton, including under the Bird’s, Angel Delight and Marvel brands, which will be manufactured either at its Ashford site or at Knighton by the joint venture under a co-packing arrangement.

Transaction details

• The proposed transaction includes the transfer of approximately £16m of private label and business-to-business sales of powdered beverages and desserts from Premier Foods to the joint venture. In addition, the Brown & Polson brand of home-baking ingredients will be licensed to the joint venture for a period of five years, which also includes a call option for the joint venture to purchase Brown & Polson for £2.75m2. Premier Foods will retain all of its other brands currently manufactured at the Knighton site.
• The 2013 EBITDA impact of Premier Foods’ private label and business-to-business sales being contributed to the joint venture was broadly neutral. The business being contributed to the joint venture by Premier Foods made a Trading loss of £0.7m for the year ended 31 December 2013.
• The gross assets, as of 31 December 2013, contributed by Premier Foods to the joint venture are expected to be approximately £15m.
• All 200 employees at the Knighton site are expected to transfer to the joint venture following an appropriate consultation process.
• The joint venture will be led by Mike Kirby, current Majority Shareholder and Group Managing Director of Specialty Powders, who will become Chairman of the joint venture upon completion. Premier Foods and Specialty Powders will each nominate three Directors to the Board of the joint venture.
• To provide a degree of certainty for the new venture, Premier Foods and Specialty Powders have committed not to sell their respective shares in the joint venture prior to 31 December 2017.
• Specialty Powders has approximately £3m of existing debt which will be repaid on completion using the proceeds from a loan from the joint venture. Premier Foods will receive a promissory note to match this principal amount which will bear a rate of interest of 8% per annum.
• Completion of the transaction is conditional upon the repayment in full of Specialty Powders’ existing debt and the joint venture’s entry into new specified financing arrangements. The joint venture is expected to benefit from a credit line of up to £10 million, the details of which will be finalised prior to completion.
• The transaction will result in cash restructuring costs for Premier Foods of approximately £4m in 2014. A further £1m of capital expenditure will also be required, although this will be accommodated within current capital plans.
• Premier Foods will enter into an agreement with the joint venture for the co-packing of branded powdered products for a minimum term of four and a half years.
• Premier Foods will enter into transitional services arrangements with the joint venture for a period not exceeding 24 months.
• The transaction is currently expected to complete by the end of June.

Completion of Logistics Consolidation

Premier Foods also announces today that it has completed the previously announced consolidation of its third party operated grocery logistics sites from three National Distribution Centres to two Regional Distribution Centres based in Skelmersdale, Lancashire and Corby, Northamptonshire. Both Regional Distribution Centres now stock the full range of ambient grocery products (excluding cake), helping to reduce the number of customer order points leading to faster order fulfilment and improved customer service. In addition, the simplified network, together with improved logistics management, will reduce the number of road journeys needed which is expected to remove around 750,000 road miles by the end of 2014. The resulting significant reduction in logistics and distribution costs is expected to offset the impact of excess warehouse capacity arising from Premier Foods’ previous disposal programme.

Investor Relations Events & Trading Update

Premier Foods is hosting an analyst visit to its Worksop site on Thursday 19 June 2014 as part of its investor relations programme and will present its Half Year results for the six months to 30 June 2014 on Tuesday 22 July 2014. While Power Brands sales for the second quarter are anticipated to be negative and below the Company’s expectations due to subdued grocery markets, profit expectations for the twelve months to 31 December 2014 remain unchanged, reflecting the Company’s ongoing focus on managing its costs. As a result the Company no longer expects Power Brands sales to grow by 2-3% for the year to 31 December 2014, as previously indicated. The analyst visit will include presentations covering the Company’s approach to innovation and supply chain initiatives and these will be posted on the Premier Foods’ website later the same day. No other material information will be disclosed as part of the visit.