Buying Peacock will take Greencore to a whole new level

Imperial Holly are two words that would send a shiver down the spine of Greencore shareholders of a certain age.

It represented a disastrous foray into the US sugar market by Greencore in the 1990s that cost the company about €40 million.

In an interview with me in December 2007, just days after he had announced his retirement from the business, then Greencore chief executive David Dilger said that, with the "benefit of hindsight", he should have given it a wide berth.

Dilger had more success with Greencore's foray into convenience foods in the UK, something that has been expanded upon greatly by Patrick Coveney, his successor as chief executive.

Coveney is now set to write a new chapter in the US for Greencore, following the announcement on Monday of a $745.5 million cash acquisition of Illinois-based Peacock Foods.

Leadership

The markets have responded positively to news of the deal, with the share price rising by 11 per cent in London to 323.9 pence by the close on Tuesday.

Broker reaction has also been strong.

Fintan Ryan, an analyst with Berenberg London, described it as a “good fit” for Greencore and doesn’t believe that the integration of Peacock Foods will distract the leadership from its core business in the UK.

Coveney has clearly done his homework on this deal. Talks began in March with an outline deal agreed in June. In advance of announcing, the Irishman sounded out about a dozen of Greencore’s largest investors.

He had also run it by the three biggest customers of Peacock, and Starbucks and 7-Eleven – Greencore's two main customers in the US.

They all gave their blessing to the deal.

The only pushback to date appears to be around the size (a considerable £439.4 million )and pricing of the rights issue (nine new shares issued at 153 pence each for every 13 existing ones). The number of shares in issue will rise by 69 per cent.

Coveney and his team have a bit of work to do before the extraordinary general meeting on December 7th to seek shareholder approval.

The deal will give Greencore substantial size and scale in the US, which will account for about 45 per cent of group revenues post acquisition.

Coveney had done a good job of building a presence in the US through strategic bolt-ons and organic growth, but the momentum of this business had arguably stalled in recent quarters.

Buying Peacock takes it to a different level, providing a four-fold increase in manufacturing capacity.

Foothold

It also gives Greencore a foothold for the first time in California and Texas, both big markets in the US. And it diversifies its customer base to include big names such as KraftHeinz, Tyson Foods and Dole.

All of the Peacock executives are remaining with the business – with the exception of the CEO Thomas Sampson, who will chair a new US advisory board for Greencore and act as a consultant for two years.

This provides much needed continuity in the short to medium term.

At just more than 10 times Ebitda, the multiple is regarded by analysts as reasonable. It falls to 8.5 times when synergies of $15 million and tax assets of $65 million are factored into the figures. And Greencore’s own current market multiple is north of 13 times.

Convenience food isn't a glamorous business, as demonstrated by some cringe videos with staff on Peacock's Facebook page.

And it’s hard to believe that any company could get rich on manufacturing frozen breakfasts and childrens’ lunchables (staples of Peacock’s business) – at a time when obesity and health and wellness are so much in the headlines.

Appetite

But Coveney has demonstrated an ability to make a deal work, notably with the Uniq acquisition in the UK in 2011, which made Greencore the biggest sandwich maker in Britain by some margin.

And there is no sign of him losing his appetite for the job after more than 11 years with the company, eight and a half of them as CEO.

“I love this job but it’s changed a lot since I’ve taken it on,” he told me on Monday.

“It was a much smaller and more challenged business when I started. We had no business in America when I became CEO. So, the business has changed a lot and that’s brought with it fresh challenges and interesting things to do.

“As long as that’s the profile of the business and as long as the board and the shareholders want me, I’d be delighted to continue doing this job.”

The proof will be in the chilled pudding.

Twitter: @CiaranHancock1