Premier in £2bn merger talks with rival RHM

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RHM, the food group behind iconic brands such as Bisto, Hovis and Mr Kipling, is expected to confirm today it has received a £2bn-plus merger approach from its rival Premier Foods, the owner of Branston pickle, Oxo and Angel Delight.

The food industry has long speculated on a tie-up between the companies, both of which have floated on the stock market in the past couple of years.

The approach to RHM from Robert Schofield, the chief executive of Premier, is understood to have been made quite recently. If the two sides can reach agreement, the deal will take the form of a takeover of RHM by its bigger rival.

Premier is likely to pay in a mixture of cash and shares. One industry insider said: "Since RHM floated, people have been saying it would make sense to merge with Premier. The industrial logic is there and the RHM share price has not performed."

RHM shares closed at 271.5p on Friday, valuing the company at £946m, compared with a flotation price of 275p some 16 months ago. Since then, the company has had two profits warnings. It has also been hit by the rising price of wheat. About half of RHM's sales come from bread and there has been a time lag in passing on the increase in raw material costs. Premier, floated by its previous private-equity owners Hick Muse two years ago, is valued at £1.3bn and enjoys a much higher stock-market rating than RHM.

Ian McMahon, the chief executive of RHM, is thought unlikely to entertain an offer price of less than 300p and if Premier paid the usual premium associated with takeover bids it would have to pay nearer 350p.

Any deal between the two companies would result in significant cost savings and potential job losses, and would put further pressure on rival manufacturers such as Northern Foods and Associated British Foods.

Premier has embarked on an aggressive acquisition strategy since its stock-market debut. It bought the non-soups business of Campell's for £460m - a deal which brought with it Homepride, Fray Bentos and Batchelors, and has recently acquired the maker of the meat substitute Quorn.

Premier was recently outbid for United Biscuits by Blackstone and PIA Partners, which bid £1.6bn for the owner of McVities Penguin and Jaffa Cakes.

At the time of the Campbell's deal, Premier strengthened its balance sheet through a £450m rights issue. Although it is sitting on a large cash pile, insiders believe it would need to pay partly in shares to pull off an acquisition as big as RHM.