Grand Met's debt pressure rises

Grand Metropolitan, the food and drinks group which is due to complete its £1.7bn acquisition of the American foods group Pet Inc next week, is under pressure to sell poorly performing parts of the business quickly to reduce debt and help shore up the company's ailing share price. Grand Met's debts will reach £3.3bn as a result of the deal. Its shares have slumped by around 10 per cent since the acquisition was announced last month.

Analysts are expecting Grand Met to sell some of Pet's lesser brands to reduce borrowings and enable management to concentrate on building the core brands, such as the Old El Paso range of Mexican sauces and the Progresso collection of Italian soups, into billion-dollar brands.

Grand Met declined to comment on its disposal plans yesterday, saying it will not formally take over Pet until the completion of the tender offer next Thursday. However a spokesman at the company's Pillsbury subsidiary in America said: "I'd say we'd makean announcement pretty quickly because we want to integrate this business as soon as we can."

It is clear from Pet's second-quarter results, released last week, that Grand Met has bought something of a mixed bag. While the Mexican foods such as the Old El Paso salsa and taco sauces increased sales by nearly 10 per cent in the three months to the end of December, sales of lower-margin private-label products, such as evaporated milk, bakery products and whipped toppings, declined by almost as much. The result was that group sales rose only by 0.5 per cent in the quarter to $458m.

Grand Met has said it is keen to focus on brands already ranked one or two in their markets. This could mean that some of the Underwoods products such as Shippams pastes, Aunt Fanny's Pecan Twirls and the Sego Lite liquid diet foods may prove surplus to requirements.

The disposals at Pet are unlikely to be the last at Grand Met as the company tries to focus solely on food and drinks. The previously loss-making Pearle opticians business is an obvious candidate for sale. Inntrepreneur, the pub joint venture with Courage, is another possibility.

A question mark also hangs over Burger King, the fast-food group. Burger bars are seen as a mature business in America and recent growth has been coming from outside of the US. Analysts have been watching the rising share price of McDonalds in recent weeks and wondering whether Burger King might prove a better performer if Grand Met floated it off.

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