Hazlewood deal to bring Greencore into European food premier division

David Dilger has described the proposed takeover of Hazlewood - which will cost €582 million when Hazlewood's debt is factored into the equation - as a "step change" for the Irish group. There's no arguing with that. The Hazlewood acquisition, although it has sizeable risks, has the capacity to propel Greencore into the premier division of European convenience food manufacturers.

So why has the reaction in the market been so cautious, with Greencore shares drifting back a few cents, even though analysts estimate Hazlewood could add 10 cents to 2001 earnings before the impact of disposals is taken into account.

Investors are naturally cautious and the view in the market is that the shares are unlikely to shoot upwards until there is clear evidence that Mr Dilger and his colleagues have got to grips with the cost-cutting and rationalisation that is essential if the price being paid for Hazlewood is to make any sense.

There is also some unease at the level of debt Greencore is taking on to fund the Hazlewood deal and future capital requirements. By any standards, interest cover of three times is tight and will require serious financial management.

But Greencore, and the bankers who are funding the deal, seems comfortable with this level of cover. In any event, the planned £120 million sterling (€199 million) worth of asset disposals should improve interest cover substantially if they are achieved within the 15 months of the deal's completion as planned. Greencore's ability to fund this deal is largely down to the banks' belief that the savings can be made and that the financial targets can be achieved.

But it seems that another bank, which was backing the competing (and higher) offer from a Paribas venture capital offshoot, got cold feet about the deal and particularly about the impact of the floods at Hazlewood's Selby factory in North Yorkshire on the group's business.

Selby accounts for an estimated 20 per cent of Hazlewood profits and is a key component of the group's business.

Extra time was something Hazlewood was not prepared to give, and this allowed Greencore to come from behind and do a deal that was not conditional on any further assessment of the impact of the Selby floods.

Last week, David Dilger and Kevin O'Sullivan played down the significance of Selby and said that insurance covered the plant and damage and loss of business.

Now, Greencore has snapped up almost 17 per cent of Hazlewood in the market and has irrevocable acceptances covering over 31 per cent of the equity.

While some of these irrevocables will be waived if Hazlewood gets counter-bids for 120p or 125p, the view in the market is that Paribas is now going to call it a day and look to put its money elsewhere.

Hazlewood shares have stayed steadily below Greencore's 113p a share offer and that's an indication of what the market thinks of Paribas reviving its 120p a share offer.

While Greencore seems to be comfortable with the tight interest cover that the Hazlewood deal brings, it seems that Golden Vale is not. Jim Murphy decided to pull out of the £130 million acquisition of the Prize Foods convenience foods business, citing the state of capital markets.