Premier Foods toasts £404m fundraising

US private equity firm Warburg Pincus invests £64m in Hovis maker

Premier Foods moved to tackle its debt mountain decisively yesterday, unveiling plans to raise £404m by selling new shares in a scheme that will leave the US private equity firm Warburg Pincus with at least 10 per cent of the food manufacturer.

Shares in the maker of Hovis bread and Branston pickle – which has been labouring under net debt of £1.7bn and has been dogged by speculation over potential breaches of banking covenants – soared by 6.5p, or 23 per cent, to 35p.

Premier Foods said the bulk of the equity issue – which will raise £379m net of expenses – will come from a placing and open offer of about 1 billion new shares at 26p on a five-for-four basis. Another half a billion shares are being placed with Warburg Pincus, raising £64m and giving the US firm 10.3 per cent of the enlarged company. The private equity firm has also agreed to purchase additional shares in the open offer, depending on take-up from shareholders, which could give it more than 20 per cent of Premier Food's equity. "The £400m goes to take the debt down and give us the head room we need. We want to take the debt [to Ebitda] ratio down to below three," Robert Schofield, the chief executive of Premier Foods, said. The equity issue will reduce Premier's net debt to £1.4bn and give it a net debt to earnings before interest depreciation and amortisation of 3.9 times.

Premier Foods said it had also extended its banking facilities until December 2013. Its refinancing came as the maker of Oxo cubes unveiled a full-year loss of £444m after it took a charge related to its acquisition of RHM, the maker of Hovis, for £1.2bn in 2007. RHM and the purchase of Campbell's saddled Premier Foods with hefty debts.

For the year to 31 December, Premier Foods posted total sales up by 22.5 per cent to £2.6bn, boosted by a strong performance from Hovis. The bread brand was relaunched in September 2008 with a lengthy television advertisement featuring a boy running through 122 years of its history. Its Hovis division delivered a trading profit up 17 per cent to £20.9m in 2008, on turnover up by 41.4 per cent to £756.3m.

Mr Schofield said: "People are buying our brands, which are pretty resilient, and I think that will extend through 2009. It will be more of the same." Premier Foods' overall underlying pre-tax profit from continuing operations grew 13 per cent to £184m.

Mr Schofield said the company had started talking to Warburg Pincus before Christmas. "They have a long-term view," he said, adding they hold their investments on average for six to seven years. The private equity firm has agreed not to sell any shares for 12 months. It also said it would not bid for Premier Foods for 18 months or, following this, not inside six months of a Warburg Pincus director leaving the board.

"We believe this is a resilient business with strong management and excellent brands," Steve Coates, a Warburg Pincus managing director, said.