Greencore shareholders will be in less than celebratory mood at the company's annual general meeting tomorrow after its attempt to merge with Northern Foods, maker of Goodfella's pizzas, appeared to end in failure last week.
Food tycoon Ranjit Boparan trumped Greencore's all-share merger with Northern Foods, offering the British company's investors 73p per share in a bid to persuade them to reject the merger. The price was far in excess of the implied value of the combined Greencore-Northern Foods offer, and about 60% higher than the Northern's share price before the proposed merger disclosed last November.
Boparan's killer bid surprised food industry analysts. Just days before Boparan announced his offer, analysts at Credit Suisse predicted he would at most pay 65p a share.
It is now up to Greencore and its chief executive, Patrick Coveney, to consider a counterbid that will almost certainly involve the company having to stump up cash as well as shares or walk away from the merger, which it said would transform the former sugar producer into one of the biggest ready-meals and chilled food suppliers in Europe with sales in excess of €2bn a year.
The €2.2m "break fee" Greencore will receive from Northern Foods for the time and effort spent working on the merger is unlikely to be much comfort to Coveney if he decides to let the merger die. Staying in the game and taking on Boparan is the biggest decision the 40-year-old has faced since succeeding David Dilger as chief executive. Winning a bidding war with Boparan will not be an easy ride. Boparan, the owner of 2 Sister Food Group, one of the main suppliers of chickens and frozen foods to supermarkets, is known to have deep pockets. He is also the owner of the Harry Ramsden fish and chip shop chain.
Aside from getting involved in a potentially costly battle, Greencore's prospects have been damaged by the chunky stake Boparan has built up in Northern since December. By the middle of last week Boparan said he owned nearly 12% of Northern's shares and there were no indications that he has stopped buying shares. It seems that only a knockout bid can prevent Northern from ending up under his control now.
But Greencore has certainly given every indication that it has no intentions of backing down from a fight. Twice last week it issued statements saying it was considering various options to make the merger work. It reiterated that the rationale for the creation of the new company – that significant savings can be achieved from the merger that will generate greater value for shareholders in both companies – was still valid.
It says getting savings of at least £40m (€46m) a year, if not more, from the combined business is possible. It said senior executives from both companies have gone through every part of the two businesses, looking at their structures, distribution and supply chains to find out how savings can be made.
"This process has reinforced the belief of the board of Greencore on the delivery of the annual net cost synergies of at least £40m," Greencore said in one of the statements. "These savings are in addition to any cost savings that may be made from the removal of overhead costs from the standalone Northern Foods cost base as a result of Northern Foods' previously announced restructuring. In addition, Greencore believes there is potential for further upside from additional operational synergies which have not yet been fully quantified," it added.
Analysts, though, believe Greencore faces an uphill battle to convince investors of the merits of the merger and that it will have to come up with a mixture of cash and shares if it wants to entice Northern's board to reject the Boparan offer.
"Boparan has not mentioned any potential cost saving, and while it is unlikely to be able to match the £40m of targeted cost synergies proposed in the Greencore merger, we had argued that investors should apply a healthy dose of scepticism over whether these cost synergies could be delivered in full," JP Morgan analysts said in a research note, adding that they don't expect the Irish company to make a cash offer to buy Northern Foods outright.
Other analysts were less optimistic about Greencore's use of this strategy to win over Northern investors.
"The prospect of cash over synergies later is not likely to leave many with a dilemma," Exane BNP Paribas said.
To take on Boparan, Greencore will have to raise fresh cash or increase its borrowings, a prospect that domestic watchers of the company said isn't in the best interest of shareholders: they want it to focus on delivering higher earnings from its existing operations.
"While Greencore continues to consider its options, we believe a counter-offer from Greencore is unlikely given the need... for Greencore to sweeten its offer and switch the bulk of its offer to cash, triggering a significant rights issue and higher levels of debt and leading to synergy erosion. With consolidation likely to remain a key feature of the sector for the near term, we believe that Greencore shareholders are best served through preservation of the group's balance sheet for other targets in the sector," NCB Stockbrokers analyst Paul Meade said.
Using cash was something it wanted to avoid since its decision to buy Hazlewood Foods a decade ago, which left the company hundreds of millions of euro in debt and forced it to sell off a large number of other assets to repay the borrowings.
The share prices of both Northern and Greencore suggest the prospects of Coveney succeeding have diminished. Northern Foods' shares traded last weekly just above the price Boparan has offered, an indication that the market believes his offer will be successful, while Greencore shares have lost about 11% since the start of the year.
The danger for Greencore now is that, having advertised that it wanted a partner, it could find itself the subject of a takeover bid.
Coveney can expect a bumpy ride at tomorrow's meeting in the Conrad Hotel in Dublin.