Blue Chip: Unlikely to take the biscuit

Despite the recent buying spree in UB shares, a bid for the company seems as far away as ever
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The Independent Online
BEWARE United Biscuits shares, unless you are brave, foolhardy or have totally illegal inside information about a pending takeover bid.

The McVitie biscuits and KP snacks group led by chief executive Eric Nicoli reports its annual results on Thursday, but the event has had little or nothing to do with the buying spree that has sent the company's share price up from 315p to 354p in the past week.

That has been inspired by a particularly virulent attack of a perennial stock market infectious disease, UB-biditis, in which normally sane and rational people convince themselves that the likes of Hanson or Tomkins are about to declare an early Christmas by taking out UB at a price unjustified on all but the most optimistic assumptions.

John Warren, UB's finance director, was level-headed enough last week to dismiss the share price rise as bid froth, while accepting that the price has become more volatile lately. But any bidder - and the list of potential candidates extends to rival food manufacturers such as Nestl and even Unilever - would have to have the appetite to swallow UB's many problems, digest them, and turn them into moneyspinners.

That will deter all but the very few, and although most analysts agree this will be the year to bid for UB because it will be at its most vulnerable, most still doubt it will happen. Mr Warren said: "We scour the share register regularly, and we have turned up no significant stake-building."

Once the bid fig leaf is removed, the sight presented by UB is not the sort with which you would want to Hobnob. That McVitie's brand, producing a then-new biscuit texture, was born of a clear technological lead that enabled the group to command premium prices while keeping its cost base to a minimum through the most up-to-date and efficient manufacturing techniques.

Despite buying niche innovator Phileas Fogg, however, that lead has been steadily eroded over the years, particularly by American giants such as Nabisco and the Frito-Lay operation owned by Pepsico.

Frito-Lay owns Smiths and Walkers crisps in the UK, and has spent a small fortune in hiring Gary Lineker to take a big risk with his super-clean reputation in a series of advertisements under the slogan "No more Mr Nice Guy". That has sent sales of Walkers, which already had a slightly racy image, soaring at the expense of UB's KP brand.

The latest recession did not help either. It made consumers more price conscious, which favours retailer own-labels and does UB no favours.

Result: the big supermarkets, here and in the US, increasingly tell UB's sales reps to get in line with the rest of the commodity snack suppliers - and, while they are waiting, hammer their prices to wafer thinness if they want precious shelf space.

While some of the group's products, particularly in the biscuit barrel, still have the market clout to command good margins, every year sees the competition come closer to treading on UB's heels.

"The group has had a degree of success with biscuits, but snacks are a problem," said Michael Landymore, food manufacturing analyst at stockbrokers Henderson Crosthwaite.

That reached a crunch in January, when UB announced that it was closing its KP factory in Grimsby with the loss of 980 jobs. UB's chairman, Sir Robert Clarke, blamed overcapacity in the crisps market, coupled with greater price competitiveness.

Mr Warren said: "It's totally unrealistic to say that UB is in a rocky state, but the markets we are operating in are extremely difficult, and conditions have been extremely tough."

Among the toughest has been the US, where UB's Keebler operation has felt the brunt of the Frito-Nabisco squeeze. Losses there accounted for the plunge in the group's share price in 1992.

To its credit, UB has responded by setting up a sophisticated, computer- controlled stock system, in which the goods are delivered in "just in time" quantities by small, so-called "step-vans".

Mr Warren explained: "We are handling the environment by building our brands, taking costs out, building market share, and increasing our exposure to developing markets." That has entailed a string of small acquisitions on the European continent and others in the Asia-Pacific region.

Coupled with the Keebler fight-back, these are bold investments in the future. But meanwhile they will depress UB's profits, possibly leaving it vulnerable to that long-awaited bid that never quite seems to materialise.

This could just be the time when it happens - plenty of money was gambled on that possibility last week. But, if hope is extinguished, the shares could fall back just as quickly.

The longer-term question is whether UB has the critical mass to take on the international food makers. Or is the company going to experience a series of false dawns as the share price chart suggests?

Better to hold off UB until later in the year, when the picture on its restructuring will be clearer - and when there may be better-value buying opportunities.

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