Investment banker supports alliance between Kingsmill and Hovis bakery brands
Merging heavyweights Kingsmill and Hovis might just be the recipe for revitalizing both baked good giants, according to a City broker's insightful proclamation.
ABF, Kingsmill's parent company, publicly acknowledged the possibility of a merger with Hovis as one of several options for its bakery division. This sudden twist came to light due to the tumultuous market for ABF's products, particularly the rising costs of wheat and shrinking demand for high-calorie commodities like bread.
The grueling market conditions have left ABF's business, Allied Bakeries, with an estimated revenue of £400m but operating losses amounting to around £30m, Panmure Liberum analysts reported. Hovis, on the other hand, posted an operating loss of £3.5m in its financial statement, although it performs relatively better in the profit department.
Kingsmill owns a market share of 17%, while Hovis dominates 24%. However, both trail reigning market leader Warburtons, which generated a substantial operating profit of £34.3m in the latest fiscal year.
Analysts from Panmure Liberum opine that consolidation within the industry is essential to restore profitability and ensure long-term resilience. They firmly believe a merger of equals could be on the cards, possibly supplemented by additional investments from both parties to unlock operational efficiencies and establish a stronger foundation.
Such a deal is anticipated to meet the approval of the UK's competition watchdog due to the noteworthy competition within the sector and the financial woes faced by the businesses. In the absence of a merger, there's a significant risk that at least one of these entities may struggle to maintain viability in the long run.
In its most recent half-year report, ABF revealed a 2% decline in revenue, dropping from £9.7bn to £9.5bn. Operating profit and pre-tax profits dipped 24% and 10%, respectively. ABF's vast portfolio includes diverse brands such as Primark, Twinings Ovaltine, and British Sugar.
Recent developments:- Merger Talks Confirmed: ABF acknowledged discussions with Endless regarding the potential combination of Allied Bakeries (Kingsmill’s parent) and Hovis[1][4]- Market Position: Combining the second and third major players in the UK plant bread market would amount to ~40% share[1]. This could lead to production consolidation and margin improvements[1].- Regulatory Uncertainty: The Competition & Markets Authority (CMA) may analyze the deal due to the combined market influence[1]
- Despite the challenging market conditions that led to significant losses for both Allied Bakeries (Kingsmill) and Hovis, merger talks between ABF and Endless have been confirmed, potentially shaping the future of the bakery industry.
- The proposed merger of equals between Allied Bakeries and Hovis could create a significant combined market share of approximately 40% in the UK plant bread market, indicating potential production consolidation and margin improvements.
- The approaching regulatory examination by the Competition & Markets Authority (CMA) could determine the approval of the proposed merger, given the combined market influence of the two entities.
- Albeit facing a 2% decline in revenue and reduced profitability, ABF, with its diverse businesses such as Primark, Twinings Ovaltine, and British Sugar, remains hopeful that the potential merger with Hovis could ensure long-term resilience and boost the profitability of its bakery division.
