Thursday 19 September 2019

Greencore drops on UK grocery tie-up

Greencore’s Patrick Coveney
Greencore’s Patrick Coveney

Gretchen Friemann

Shares in Greencore fell yesterday as investors fretted about the potential adverse impact on the group's UK sandwich business from a proposed mega-merger between Sainsbury's and Asda.

The Dublin-headquartered food group - led by Patrick Coveney - is the sole sandwich supplier to the two supermarket chains, a fact highlighted by Goodbody analyst Jason Mollins in a note to clients.

But the possible creation of a new retail behemoth - the deal is subject to authorisation by the UK's competition watchdog - has provoked consternation among investors in grocery suppliers amid fears it will ratchet up pricing pressure and corrode margins.

Greencore - which remains the top shorted company on the London stock exchange following a shock profit warning in March linked to its legacy US division - is now the world's largest sandwich maker by volume. It dominates the UK market with a 60pc-plus grip on the sector. As Mr Mollins noted, a merger between Sainsbury's and Walmart-controlled Asda would rank the combined enlarged entity as Greencore's second-largest customer, behind Marks & Spencer.

Market sources argue that Greencore's scale in this sector leaves it less vulnerable to a material impact from a beefed-up supermarket chain.

Others are less certain. According to Jonathan Buxton, partner at Cavendish Corporate Finance, "hard-pressed UK supermarket suppliers will rightly be concerned that they will face further customer concentration and pressure on margins".

Mr Mollins claimed the combined supermarket group will represent about 15pc of Greencore's profit - Asda currently accounts for close to 10pc and Sainsbury's about 5pc.

He said "Greencore is the sole supplier of sandwiches to both businesses. Therefore, we believe the scope to negotiate on pricing around the food-to-go offering is somewhat more limited".

But he claimed the group's ready-meals division may benefit from the merger, by enabling Greencore "to deepen their relationship in these categories".

The group's shares closed down over 1.2pc to £1.58 (€1.79).

If the merger of Sainsbury's and Asda goes ahead it would value the latter at £7.3bn on a debt-free, cash-free and pension-free basis. (Additional reporting Bloomberg)

Irish Independent

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