Business

Sunday 18 November 2018

Samantha McCaughren: Lucky escape for Greencore as its American dream goes stale

Greencore is the world’s largest sandwich maker
Greencore is the world’s largest sandwich maker
Samantha McCaughren

Samantha McCaughren

The streets of America aren't quite paved with gold, but they are embedded with great opportunity.

A handful of Irish companies have enjoyed immense success there. Five spring to mind - Smurfit, CRH, Kerry, Glanbia and Jameson-owner Irish Distillers.

They are five very Irish businesses which created a huge amount of shareholder value in the US. On the face of it, they had no natural advantages going into the market, which is probably the most efficient and competitive industrial market in the world.

They also all went up against stronger, more long-established US competitors.

All of these companies went on to create vastly greater returns for investors in the US than they ever could have dreamt of in the limited Irish market. As one market source observed: "If you get it right in the US you can do things unimaginable in Ireland."

But getting it right is the hard thing.

There are countless stories of Irish (and indeed UK) companies trying their hand in the States, and retreating with considerably lighter pockets.

Among the Irish plcs which have crossed the Atlantic without success are Bank of Ireland and AIB, and even Permanent TSB gave it a go. Cider maker C&C made a disastrous investment in Vermont Hard Cider in 2012 for more than €230m.

None of these companies did anything to enhance shareholder value by expanding into the US.

Last week it was the turn of Greencore to admit that its American dream was over. Chief executive Patrick Coveney, who no doubt watched with awe the success of CRH et al, had a long-held personal ambition to crack America.

In the early days of Greencore's capital investment programme there, it picked up accounts with some impressive names such as convenience chain 7-Eleven and Starbucks. In a 2012 interview in the British press, Coveney spoke with authority about the US opportunity, outlining how expansion for the group would first concentrate on the eastern states. "There are plenty of legs in the business to expand over time," he said.

But delivering on his ambitions proved challenging. Targets for growth in the US weren't met, with Davy in 2015 describing how "development of the US revenue base is proving more volatile than anticipated owing to customer concentration and lumpiness in the off-take".

In 2016, 'a transformational' deal to buy Peacock Foods, which produced among other things frozen breakfasts, for $747m (€651m) seemed to be a breakthrough. But by March of this year, Greencore was warning that its US business was not meeting expectations. Coveney said he would personally move to the US to get matters under control.

It was beginning to look like Greencore was following a predictably downward spiral in the land of opportunity.

As it turned out, the company which sold Greencore the Peacock business back in 2016 was waiting in the wings with an offer to buy the business.

Charlesbank Capital Partners originally sold Peacock to Greencore. Charlesbank went on to acquire Hearthside Food Solutions, the largest independent bakery in the US. And now Hearthside has bought Greencore's US arm for $1.1bn.

For Greencore, getting out of the US was clearly the right thing to do. In fact it looks like a lucky escape.

On the face of it, there is a financial upside to the deal in a few short years. But the overall foray into the US won't have delivered much value to investors.

It represents a complete reversal in strategy on the US, which was in essence half of Greencore's business. The US is shut off for Greencore for the foreseeable future. Coveney has to be given credit for pouncing on the opportunity to get out when the US was clearly not working and a very respectable offer came along. But it does not validate the decision to enter the market in the first place.

It does raise broader questions about the future strategy of the company. With the US business gone, Greencore is a UK sandwich maker, high volume, low margin business. It has done an excellent job as a sandwich maker in that market, but what next? Does it really need to be a listed company any more? If it was a target for private equity when it had the US business, as has been speculated before, surely it is now a better fit than ever for such an approach.

***

Paddy Power Betfair didn't cover the betting sector in glory last week. It was fined £2.2m by the UK gambling watchdog for a raft of failings including allowing a punter to gamble money stolen from a dogs home. Said Richard Watson, executive director of the Gambling Commission: "Operators have a duty to all of their customers to seek to prevent the proceeds of crime from being used in gambling."

The problem may have occurred a few years ago but at a time when tighter regulation is inevitably heading for the sector, issues such as crime or gambling addiction are headlines the industry could do without - especially when independent Irish bookies are trying to fight the doubling of betting tax in the Budget.

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