Thursday 8 December 2016

Greencore stalker is still a dark horse as sandwich maker may soon become lunch

Published 27/10/2011 | 05:00

THERE is nothing like the frenzy that an old-fashioned takeover story can spark these days.

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Not only because we have been mired in an economic crisis for three years, but this week's announcement that Greencore is in talks to be taken over by an unnamed party also had the whiff of scandal about it after Greencore's shares rocketed in the hours before the talks were made public.

When companies tell the market they are in negotiations with an anonymous suitor, the buyer usually emerges fairly quickly, or is at least obvious to the market. Not this time, however.

Analysts can't see a trade buyer at present and while private equity (PE) firms CapVest and Lion Capital have been mentioned as potential suitors, it is a matter for debate if PE would want Greencore.

Discount

Greencore is trading at a discount to its peers, with a price to earnings ratio (P/E) of just under six against the sector average of 10.64.

Historically, private equity firms like to buy at a P/E of between five and six.

A bid of, say, 75c a share, would be towards the top end of that range, but would hopelessly undervalue Greencore in the eyes of many investors who have suffered huge loses on their shares.

The timing of the talks is also curious. Immediately after Greencore's attempted purchase of Northern Foods had collapsed it would have made sense for someone to try to buy the company at a depressed price.

Since then, chief executive Patrick Coveney has paid out close to €130m for the British sandwich maker Uniq, and has diluted shareholders to help finance the deal.

The integration of Uniq into Greencore is only starting, adding another wrinkle to a deal that would already be complicated enough.

Problem

The other problem with the timing of the talks is the macroeconomic climate.

The worsening problems in the eurozone have taken a severe toll on the continent's banks over the summer and will have pushed up the cost of financing for a takeover.

If that wasn't enough, Greencore is operating in a low-margin business depending largely on UK consumer sentiment, which has declined.

Still, Coveney expects 40pc growth in EBITDA by next year, a target being treated with scepticism by market watchers.

The fact that the company has announced it is in talks is normally a sign that a bid is coming. What happens after that will be up to the shareholders.

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