October 7, 2011 / 6:46 AM / 8 years ago

UPDATE 2-Premier Foods renegotiates covenants as sales slump

* CEO says reaching deal with banks is immediate priority

* FD says confident of reaching agreement on refinancing

* FD says would be close to breaching interest covenant

* To focus on 8 key brands, sell non-core businesses

* Shares down 37 percent

By Matt Scuffham

LONDON, Oct 7 (Reuters) - Britain’s biggest food manufacturer Premier Foods on Friday warned its full-year trading profit would be below market expectations and said it was in talks with its banks to relax the terms of key tests of its financial health.

Shares in the company, which have collapsed from a high of 288 pence in 2007, were down 35.5 percent to 6.454 pence at 1021 GMT, valuing the business at 144 million pounds.

“Our immediate priority is to conclude discussions with the banks to revise our banking covenants and put in place refinancing facilities,” said new chief executive Michael Clarke, who joined the company in September from Kraft .

Clarke said talks with its banks were focussed on ensuring that appropriate banking covenant headroom is maintained and extending its current banking facilities past their current maturity date of December 2013.

“We’re pretty optimistic at the moment about concluding an appropriate deal,” Finance Director Jim Smart told reporters on a conference call.

Investec Securities analyst Martin Deboo said he expected the consensus forecast for Premier Food’s 2011 operating profit to fall by over 10 percent to below 200 million pounds.

“Now the question is whether this company can survive. To say that all this adds up to a baptism of fire for new CEO Mike Clarke feels like the understatement of the year,” he said.

Premier Food’s next covenant test is due at the end of the year and Smart said trading during the remainder of the year would hold the key as to whether the company would pass the test based on its current criteria.

“We’re a little bit close to our interest covenant. That’s artificially tight because as we did disposals and as we locked in our swaps we lost a little bit more income than the interest rate that comes off the bank debt,” Smart said.

Premier Foods has been selling businesses to bring down its debt, which ballooned following the acquisitions of RHM and Campbell Soups’ UK and Irish business. However, it said net debt at the year end would be higher than the 850 million pounds currently expected by the market.

Clarke set out plans to rejuvenate the business and said he had identified eight key brands which the business would focus on going forward — Ambrosia, Batchelor’s, Bisto, Hovis, Loyd Grossman, Mr. Kipling, Oxo and Sharwood’s.

Premier Foods said it would actively seek to dispose of other businesses and the downsizing of the business would help it significantly exceed its 20 million pounds cost saving target by 2013.

The company said total sales fell by 3.6 percent to 477 million pounds ($734 million) in the third quarter with sales volumes dropping 8 percent.

Its market share dropped by 1.9 percent in value terms and 2.1 percent in overall sales volumes.

Premier Foods’ customers have been struggling as consumers, hit by subdued wages growth, a lack of credit and government cutbacks, make economies to cope with rising prices.

Premier Foods was also hit by a row with a major customer — said by analysts and media to be Tesco — which refused temporarily to stock its products after it put up prices to offset raw material cost inflation.

Pressure on consumers was laid bare on Wednesday as top retailer Tesco posted one of its biggest-ever quarterly falls in underlying sales, while rival J Sainsbury reported only modest growth.

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