City broker backs Kingsmill merger with Hovis
A “merger of equals” between Kingsmill and Hovis may be necessary for the turnaround of both businesses, a City broker has said.
Kingsmill-owner ABF confirmed this morning that it was exploring a merger with Hovis as one of several options for its bakery arm.
ABF said the talks had been prompted by a “very challenging” market for its products.
ABF’s business, Allied Bakeries, generates approximately £400m in revenue but incurs operating losses of around £30m, according to Panmure Liberum analysts.
Hovis also reported an operating loss in its most recent financial statement, albeit a smaller figure of £3.5m.
Kingsmill has a market share of 17 per cent, while Hovis has a market share of 24 per cent.
Both companies are trailing market leader Warburtons,which delivered an operating profit of £34.3m in 2023.
“The industry needs consolidation to restore profitability and ensure long-term viability,” Panmure Liberum analysts said.
“We believe the most likely structure would be a merger of equals, potentially accompanied by additional capital investment from both parties.
“This could unlock operational efficiencies and create a more sustainable platform.”
Panmure also suggested the merger would be approved by the UK’s competition watchdog due to “the current level of market competition and the loss-making status of the businesses”.
“Absent a deal, there is a material risk that at least one of these businesses may not remain viable over the longer term,” they added.
In its latest set of half-year results, ABF reported a two per cent drop in revenue, from £9.7bn to £9.5bn.
Operating profit fell 24 per cent, from £931m to £710m, while profit before tax fell 10 per cent, from £911m to £818m.
ABF owns a diverse range of brands, from Primark to Twinings Ovaltine and British Sugar.