UPDATE 1-Premier Foods hands control of Hovis to U.S. Gores Group
* Hovis to see investment of 200 mln pounds over five years
* Premier's grocery business to 28 mln pounds investment
* Capital structure review is ongoing
PARIS, Jan 27 (Reuters) - Britain's Premier Foods will hand control of Hovis bread to U.S. investment firm The Gores Group, in a deal which values the struggling unit at 87.5 million pounds ($144.40 million).
The deal puts an end to months of speculation about the direction of the ailing business, which has suffered from intense competition from branded and private label players, and should inject new capital to allow Premier Foods to focus on its other grocery brands, such as Mr. Kipling cakes.
"We believe it's a win-win for both halves of our business," Premier Chief Executive Officer Gavin Darby said on Monday.
Premier Foods said its trading profit for the year to the end of December was in line with expectations.
The Gores Group will pay 30 million pounds for a 51 percent stake in Hovis, with Premier keeping the rest.
The transaction will give Premier a short-term cash inflow of 28 million pounds, which it plans to invest in its grocery business, including to improve capacity in the cake business. Premier plans to invest about 20 million pounds in a new line for Snack Pack cake slices at a factory in Carlton, Barnsley.
The two parties have also agreed to invest a combined 45 million pounds in Hovis, which will enable an investment of 200 million pounds over five years, to be used for capital expenditures and for a significant increase in marketing.
The anticipated investment in Hovis is "quantums greater" than it has been recently, Darby said.
The parties are locked in to the venture for at least three years, and Darby declined to say what would happen after that.
"It all depends on what other incremental structural opportunities there are in the future," he said, referring to the company's ongoing capital restructuring plan.
Premier said in December it was weighing the possibility of launching a rights issue. It said on Monday it was in "constructive discussions" with its pension trustees about the 2013 actuarial valuation of the pension schemes and a related recovery plan and continues to review the full range of options available regarding its future capital structure.
The bread business will operate under the name Hovis Limited, and will be run by Bob Spooner, currently managing director of Premier's bread and group supply chain.
"We welcome this announcement ... as it can start to allow the value of Premier's grocery brands to emerge" said Shore Capital in a research note. "Such emergence, however, depends upon the successful completion of the capital restructuring."