FDBusiness.com

M&A activity is expected to recover in the UK and other European markets during 2011. A clear sign of this is the last minute 73p a share offer for UK convenience food group Northern Foods by Boparan Holdings, which is controlled by food business entrepreneur Ranjit Singh Boparan. Boparan’s £342 million offer is being recommending by the board of Northern Foods, which has withdrawn its support for an earlier Greencore proposal for an all-share merger of equals.

The Boparan offer of 73p a share is 52% higher than the implied value of Northern Foods under Greencore’s proposed merger. The latter deal would create Essenta Foods, a £1.7 billion turnover business with strong positions in private label production along with significant band strength in biscuits and frozen pizzas, through Fox’s and Goodfella’s.

Because of the highly complementary nature of Northern Food and Greencore, the merger is projected to yield cost synergies of £40 million per annum within three years, with at least half being realised within the first 12 months after completion. The same level of synergies is not available to Boparan. Indeed, Greencore has suggested that the estimate of synergies is conservative.

Some analysts had suggested that an offer in the 75p-80p range was required to discount the potential of the Greencore/Northern Foods merger. However, the advantages of an all cash deal cannot be underestimated.

Greencore is now likely to improve its offer with a cash element. If successful, Greencore will integrate the two businesses, whereas Boparan would be expected to auction off parts of Northern Foods, with the Fox’s biscuits and Goodfellas frozen pizza brands possible candidates.

Recovery in M&A Activity

M&A activity, having slowed dramatically in 2009, started to recover globally last year, following a number of mega deals – most notably PespsiCo’s $3.8 billion acquisition of a 66% stake in Russian dairy and food group Wimm-Bill-Dann Foods, and the $5.3 billion private equity takeover of Del Monte Foods.

According to specialist law firm Rollits, although M&A activity in the UK market has been subdued more activity is expected with question marks remaining over a number of quoted food plcs other than Greencore and Northern Foods. Rollits point out: “The private equity firms interested in food have healthy funds and have been actively looking both to buy and sell, with Lion Capital and PAI Partners very much to the fore. Interestingly, private equity firms such as Langholm and Darwin have been willing to do smaller deals in niche, branded categories.”

Indeed, two private equity firms – Exponent and Intermediate Capital Group – have just agreed to buy Premier Foods’ meat-free business for £205 million.

Future Deals

If Greencore fails to acquire Northern Foods it is likely to be involved in a large deal in the coming year as it seeks a strategic partnership in order to significantly increase scale. Alternatively it could become a takeover target. In the past it was linked with Icelandic food group Bakkavor, which became one of the leading fresh prepared food processors in Britain after acquiring Geest for £580 million in 2005.

During 2008, Bakkavor built up an 11% stake in Greencore ahead of what was expected to be a move to merge the two companies. However, following turmoil in global financial markets, especially in Iceland, and a plunge in the Greencore share price, Bakkavor was forced to relinquish its economic interest, resulting in a loss of £58.5 million. Indeed, this was a contributory factor in the Icelandic food group moving from a pre-tax profit of £57.3 million in 2007 to a loss of £144.9 million in 2008.

The drop in Greencore’s share price clearly highlights the attractiveness of Boparan’s all cash offer for Northern Foods’ shareholders.