Has Greencore’s Coveney saved his job by unravelling his US strategy?

Greencore chief executive Patrick Coveney reached for superlatives as he unveiled a $747 million (€652.3 million) deal in November 2016 that, he hoped, would help him finally crack America.

“This is a historic day for Greencore,” he told analysts after the Irish sugar company-turned UK’s biggest sandwich maker agreed to buy Illinois-based Peacock foods in a bid to quadruple US sales, adding that it was “a landmark deal”, a “bang-on strategy” that gave the group “scale and capability to win in both the UK and US”.

Not put off by his predecessors' ill-fated venture into the US in the late 1990s through the purchase of a stake in Texas sugar company Imperial Holly, Coveney sought from the outset of his tenure to replicate Greencore's phenomenal UK success Stateside.

Weeks into the top job in 2008, he presided over Greencore’s $44 million (€38 million) purchase of Boston-based chilled convenience foods specialist Home Made Brands Foods. He would commit an estimated $200-$250 million on US deals and investment over the next seven years, but struggle to make a proper inroad into the world’s largest economy until the Peacock purchase.

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Severely damaged

Investor faith in Coveney’s vision was severely damaged last March when a number of issues – mainly in the legacy US business before the Peacock deal – prompted a profit warning, 30 per cent share price slump, and pledge from the 47-year-old to spend half his time on the other side of the Atlantic to sort out the problems.

Nobody was prepared, however, for Greencore's announcement on Monday that it has agreed to sell its entire US business for $1.075 billion to Heartside Foods, the country's largest maker of nutrition and snack bars for major brands, after receiving an unsolicited approach in late August.

Heartside's owner? Private equity firm Charlesbank Capital Partners, which originally sold Peacock to Greencore.

Greencore has presented the deal as a “premium” to what it paid for Peacock and the “carrying amount of invested capital in the US”.

In reality, however, it is barely getting back the money pumped into the US in the past decade, after writing down the value of its state-of-the-art facilities in Jacksonville, Florida, and Rhode Island.

It’s clear Coveney has struggled with the US disposal. He was, after all, as he said this week, an “advocate and champion” for the development of the business.

‘Emotional disappointment’

“For some of us, it has some level of emotional disappointment, because of what we had personally invested to get our US business onto the path that it’s on,” he said, adding that after a difficult start to its financial year, it had a “really strong second half” to the end of September.

The deal values Greencore USA at 13.4 times earnings before interest, tax, depreciation and amortisation (Ebitda), compared to the multiple of 10.4 that Greencore paid for Peacock.

Indefatigable by reputation, having initially been rejected by Oxford and consultancy firm McKinsey before getting into both on second attempts, the natural temptation would have been for Coveney to resist a US sale.

Analysts largely believe he’s done the right thing by shareholders, who will receive £509 million (€577 million) in special dividends on completion of the sale – about 16 per cent more than it raised from investors two years’ ago to help fund the initial purchase.

Coveney spent much of his time on calls with analysts, investors and reporters this week defending Greencore's retreat to the UK even as the sector grapples with Brexit uncertainties, which is expected to impact labour supply and some raw material costs, as well as consolidating and increasingly-powerful groceries groups. Sainsbury and Asda are seeking to merge, months after Tesco purchased of cash-and-carry chain Booker.

Market share

Greencore’s key UK food-to-go business in sandwiches, salads and sushi has delivered 23 per cent year-on-year sales growth since 2011 – as it gobbled up market share in a market that was growing at 6 per cent per annum over the period.

However, the group expects to deliver “mid-single digit” percentage sales growth in this category over the next five years – in line with the market.

Still, Fintan Ryan, an analyst with Berenberg, said UK profitability may also be helped as Greencore moves its focus from chasing growth to achieving efficiencies. Coveney said on Monday that Greencore UK had “really learned” from Peacock on how to drive the business more efficiently.

Chief financial officer Eoin Tonge also hinted that Greencore will reset its progressive annual dividend at a higher level, saying the payout on 2018 earnings will be "the benchmark".

It could be argued that Coveney, having promoted chief operating officer Peter Haden to the new role of CEO of the UK division in July, has effectively dealt himself out of a job with the US unit's sale.

But as the UK supermarket landscape changes, Greencore may need Coveney’s relationships with top customers more than ever.