Business Analysis: Premier's shopping spree leaves a headache in store

Company behind Sudan 1 food scare built by private equity acquisitions
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The Sudan 1 food scare, which has now caused more than 400 products to be withdrawn from supermarket shelves since Friday, is just the latest drama in the short but eventful life as a public company of Premier Foods.

The Sudan 1 food scare, which has now caused more than 400 products to be withdrawn from supermarket shelves since Friday, is just the latest drama in the short but eventful life as a public company of Premier Foods.

The St Albans-based company, with a 3,000-strong workforce, specialises in buying tired brands and trying to reinvigorate them to squeeze the last few drops of profit growth from names including Typhootea, Hartley's jam and HP canned foods.

Every year, more than three-quarters of all UK households buy at least one of its brands, the company's website claims. However, despite its Englishness, Premier is the product of the investment skills of the Texas-based private equity group Hicks, Muse, Tate & Furst. Since 1999 Hicks, Muse has been vacuuming up the UK's faded food brands and subjecting them to the latest Wall Street management techniques, stripping out costs and boosting profit margins.

But Premier's acquisition spree also brought it the Crosse & Blackwell Worcester sauce brand that contains the offending shoe polish dye, known as Sudan 1, which food hygiene experts have identified as a potential cause of cancer and which has been banned from foodstuffs in Europe since July 2003.

The Crosse & Blackwell Worcester sauce also happens to be an ingredient in hundreds of other food products and the presence of Sudan 1 has triggered a mass withdrawal of products as diverse as Pot Noodle, Walkers Crisps and dressings used by McDonald's.

The company refused yesterday to discuss the possibility it might face claims over the cost of product recalls from other companies affected. "There is no comment on liabilities. It's too early to talk about that," a spokesman said.

However, management at Premier, led by Robert Schofield, the chief executive, are no strangers to alerting the stock market to sudden problems. In October fire swept through the company's Branston Pickle factory in Bury St Edmunds which caused extensive damage and hit profits by more than £1m.

Earlier this month the company had to relay the gory tale of how a worker, repairing the fire damage at the factory, had a hand severed by machinery, which then fell into an eight metre deep casing and could not be retrieved.

The fire will also cast a shadow over the company's 2004 results, having lost sales from two of its most important brands, Branston Pickle and Loyd Grossman sauces, for the last 10 weeks of the year. The company said in a trading statement in January that like-for-like sales for the year as a whole would be flat as a result.

However, the Sudan 1 food dye scare is proving to be a headache on a much bigger scale as Premier's problems spill over into other company's products.

Mr Schofield was reluctant to talk about how the company was dealing with the Sudan 1 case yesterday, with a company spokeswoman saying Premier's senior management team was busy dealing with the situation.

So far the company's statement to the Stock Exchange on Friday relating to the product recall has kept investor concerns to a minimum, particularly over the potential threat to consumers' health.

The Food Standards Agency (FSA), itself now embroiled in a dispute over why it took so long to alert the public, said that Sudan 1 could contribute to an increased risk of cancer. However, at the levels present in the Premier Foods case, the risk was likely to be very small and there was no immediate risk of ill health, the FSA said.

Shares in Premier were down 4.75p or 1.7 per cent yesterday having risen slightly on Monday. But there could be longer-term effects both on Premier's Worcester sauce brand and on the brands affected of other food companies.

Rita Clifton, the chief executive of Interbrand, the brand consultancy group, said: "I don't know whether it's curtains for that brand in particular but it will take a lot of time to recover. John West recovered from a food poisoning scare a few years ago. Management will have to weigh up the strength of the brand and the cost it will take to revive it. You have to act fast. You have to communicate, communicate, communicate and put it right convincingly."

The company's silence over the past 48-hours would appear to fly in the face of such expert advice but Premier is relatively new to the heavy expectations for information placed on companies in the public gaze. It has only recently emerged from ownership by the UK's burgeoning and increasingly powerful private equity community.

Its flotation in July last year was the culmination of a five-year investment strategy masterminded by Lyndon Lea, 36, the European head of Hicks, Muse. Although he has all the trappings of a typical Wall Street rainmaker, including the accent, wealth and Goldman Sachs mergers and acquisitions background, he is originally from Morecambe Bay.

A peripatetic Lancastrian, he built up Premier Foods for Hick, Muse through a series of acquisitions, a strategy that has continued after the flotation.

Mr Lea is still on the board of Premier, although Hicks, Muse has sold its remaining interest. It announced in December that it was spending £70m buying Bird's, the best-selling custard brand, from Kraft of the US but that was just the latest in a series of acquisitions.

Premier was formed from the takeover in 1999 by Hicks, Muse of Hillsdown Holdings in a deal that valued Hillsdown's shares at £532m plus debt of £285m. A series of disposals whittled the group down to its core brands and Hicks, Muse then embarked on a series of bolt-on acquisitions with the most important being the acquisition in 2002 of Nestlé's non-chilled food business for £135m.

This brought Mr Lea big brands such as Branston Pickle and the rest of the Crosse & Blackwell range, Sun-Pat peanut butter and Gale's honey, as well as Sarson's vinegar. In November 2003 the company announced it was buying the Ambrosia rice pudding and custard business from Unilever for £105m.

Premier's progress stalled slightly during last summer's float when it was forced to accept a price from stock market investors at the low end of its expectations. At 215p a share, the company was valued at £527m but after a brief dip to 208p, the shares have been on a long run upwards with the company now valued at £692m.

As the share price has progressed the deals have continued but investors are now waiting nervously to see if the Sudan 1 scare causes the company more lasting damage.