Food alliance has plenty of sweeteners

ANALYSIS:FORGET THE IMF and talk of bailouts from Brussels. Greencore proved yesterday that there's life in the aul' sod yet.

Its proposed merger with Leeds- based Northern Foods originated in Dublin, with Greencore chairman Ned Sullivan floating the idea with his counterpart Tony Hobson back in July during the course of a catch-up meeting.

This merger will roughly double Greencore in size. Importantly, the new entity, called Essenta, will be based in Dublin with Greencore boss Patrick Coveney at the helm.

This deal gave much-needed momentum yesterday to Greencore’s share price, which has threaded water for some time. Its shares rose by 29 per cent to €1.34 following a day of heavy trading.

Traders in Dublin yesterday described the merger as a “win-win” and “highly synergistic”.

Coveney has spent the past couple of years tidying up Greencore’s balance sheet and switching the focus towards convenience foods. In the past 12 months, he has flogged its water business in Scotland, the malt division in Ireland and its convenience foods operation in continental Europe.

The proceeds have slashed its net debt.

All this done, Greencore either needed to “sell up or scale up”, according to one analyst. This merger seems to fit the bill nicely.

Northern Foods has had problems of its own, mostly to do with a chunky pension deficit and an underperforming frozen foods division.

It has good brands though that have potential.

Convenience foods is a low margin, high-volume business. Scale is crucial, as are lean manufacturing and distribution operations.

Coveney is targeting cost savings of £40 million a year which, he said, would boost Essenta’s profitability by 30 per cent.

Crucially, Greencore and Northern Foods have been able to structure a deal in a way that doesn’t add to the indebtedness of the overall entity.

This was important at a time when credit is thin on the ground, although they have negotiated a five-year €450 million credit facility.

Not adding to the debt pile is important in another way. When Greencore acquired Hazlewood Foods some years back, under the watch of David Dilger, the company was left with hefty debts that took years to sort out. This deal offers a neater solution.

Sadly, for the Irish Stock Exchange, it will mean the loss of another leading stock.

That’s a small price to pay though for what is otherwise a positive development for the Irish food group.

Greencore: 2010 RESULTS

Sales: €856m (+6.9%)

Operating profit: €59.7m (+17.6%)

Earnings per share: 16.7c (17.4c)

Dividend per share: 7.5c (unchanged)

Current trading is described as “encouraging” but the results were overshadowed by the announcement of a planned merger with Northern Foods, a move that would double the size of Greencore and make it a bigger force in the convenience foods sector in Britain.

A big theme in the year was the disposal of non-core assets and a 32 per cent reduction in its net debt.

With Northern Foods chilled, frozen and bakery brands soon to be added to its pantry, Greencore looks well placed for future growth.