Low & Bonar ends Kellogg contract

Low & Bonar's investors were stunned yesterday by news that the company was terminating a contract to supply cartons to Kellogg, the maker of cereals. The company's shares plunged 32p to 243.5p following the announcement, which was made less than an hour before the stock market closed.

A spokesman for Low said the company was unable to meet the new low price required to retain the Kellogg contract to supply cartons for a further five years when theagreement expired in May 2000.

Jim Heilig, chief executive of Low, said the contract would run its course and there would be no effect on group profits for the next two years. The market value of the equipment exceeded book value, even if no replacement contract could be negotiated.

There should be no immediate effect on the 230 employees at the Low & Bonar plant at Earlham, near Manchester, which is dedicated to the Kellogg contract.

Low said the price levels required to retain the contract would have resulted in a minimal return on the significant capital investment needed.

The product specification would be unchanged but the new generation of equipment needed would have cost up to pounds 15m.

The deal with Kellogg, which recently put out to tender its world-wide purchasing contracts, is worth about pounds 40m a year. While this equals almost 10 per cent of group turnover, the profit margins are narrow.

"We could not justify to our shareholders the retention of this business at unacceptable margins," Mr Heilig said.

The announcement came just 48 hours after the company announced a 16 per cent drop in profits to pounds 23m for the six months to May and a two-point drop in margins to 11 per cent on static sales of pounds 215m.