Premier Foods has entered into a joint venture (JV) agreement with Specialty Powders Holdings to manufacture powdered beverages and desserts worth £16m. The new JV, called Knighton Foods, will encompass Premier’s private-label business in powdered beverages.
The powdered food products will be produced at Premier’s factory in Knighton, Staffordshire. The new JV will combine dry powders manufacturing capabilities and assets from both parties at the Knighton site. The agreement will also enable the transfer of two production lines from Knighton to Premier’s manufacturing plant in Ashford, Kent, resulting in ‘significant further efficiencies’ in Premier Foods’ broader grocery manufacturing structure.
Gavin Darby, chief executive of Premier Foods said: “This innovative agreement will help to improve the efficiency of Premier’s grocery infrastructure and, at the same time, allows us to benefit from a dedicated team with expertise that can support our powdered beverages and desserts business. I’m delighted that, in Specialty Powders, we’ve found a highly successful, entrepreneurial partner, which is committed to growing the combined business. This is a very positive development both for Premier Foods and for our employees at Knighton.”
Mike Kirby, Majority Shareholder and Group Managing Director of Specialty Powders, said: “This is a fantastic opportunity for both parties. Knighton Foods will have a strong focus on dry powder products with the ability to invest in new processes, products and packaging formats. Our combined technical expertise and manufacturing capabilities will ensure that we continue to deliver high quality products for our customers and consumers, and enable us to develop a successful, broad-based powder processing and packing business for the future."
Under the terms of the agreement, Specialty Powders will contribute its wholly-owned businesses, Phoenix Foods and Agglomeration Technology, to the joint venture, in consideration for a 51% controlling stake and a loan from the joint venture to repay its existing debt. Premier Foods will contribute the Knighton site and assets (other than the two production lines that will be transferred to Premier Foods' site in Ashford) to the joint venture, together with its private label and business-to-business sales of powdered beverages and desserts, in consideration for a 49% stake in the joint venture and a promissory note of a principal amount equal to the loan to Specialty Powders.
Premier Foods will retain the substantial majority of its branded sales currently made at Knighton, including under the Bird's, Angel Delight and Marvel brands, which will be manufactured either at its Ashford site or at Knighton by the joint venture under a co-packing arrangement.
The proposed transaction includes the transfer of approximately £16m of private label and business-to-business sales of powdered beverages and desserts from Premier Foods to the joint venture. In addition, Premier’s Brown & Polson brand of home-baking ingredients will be licensed to the joint venture for a period of five years, which also includes a call option for the joint venture to purchase Brown & Polson for £2.75m. Premier Foods will retain all of its other brands currently manufactured at the Knighton site.
Specialty Powders has approximately £3m of existing debt which will be repaid on completion using the proceeds from a loan from the joint venture. Premier Foods will receive a promissory note to match this principal amount which will bear a rate of interest of 8% per annum.
Completion of the transaction is conditional upon the repayment in full of Specialty Powders' existing debt and the joint venture's entry into new specified financing arrangements. The joint venture is expected to benefit from a credit line of up to £10 million, the details of which will be finalised prior to completion.
The transaction will result in cash restructuring costs for Premier Foods of approximately £4m in 2014. A further £1m of capital expenditure will also be required, although this will be accommodated within current capital plans.
The news comes as Premier announced sales of its main brands, including Mr Kipling, Bisto, Batchelors, Oxo and Ambrosia are ‘expected to be negative and below the Company’s expectations’. In a trading update, Premier blamed ‘subdued grocery markets’ for an unexpected fall in sales of its ‘power brands’, in the second quarter of its financial year. In recent months the company has sold Hartley’s jam, Sun-Pat peanut butter and Branston pickle.
Premier Foods also announces today that it has completed the previously announced consolidation of its third party operated grocery logistics sites from three National Distribution Centres to two Regional Distribution Centres based in Skelmersdale, Lancashire and Corby, Northamptonshire. Both Regional Distribution Centres now stock the full range of ambient grocery products (excluding cake), helping to reduce the number of customer order points leading to faster order fulfilment and improved customer service.
In addition, the simplified network, together with improved logistics management, will reduce the number of road journeys needed which is expected to remove around 750,000 road miles by the end of 2014. The resulting significant reduction in logistics and distribution costs is expected to offset the impact of excess warehouse capacity arising from Premier Foods' previous disposal programme.
