Funds Circle Hovis As Premier Hunts New Dough

A pack of investors are in talks with the owner of Hovis, Britain's leading bread brand, as it seeks backers to help finance a revival of the struggling division.

Sky News can reveal that Premier Foods (LSE: PFD.L - news) is in discussions with at least three funds about injecting tens of millions of pounds into its bread unit.

Two of the prospective investors - HIG Europe, the London-based arm of HIG Capital, and Sun European Partners - are specialists in achieving company turnarounds, while a third, PAI Partners, has extensive experience of owning food and beverage brands.

The talks are understood to be at a relatively early stage, and come just three weeks after Premier (NasdaqGS: PINC - news) appointed advisers to explore options for its bread division, which includes Hovis, Mother's Pride and a substantial own-label operation.

Premier's chief executive, Gavin Darby, has said he wants to take the Hovis brand upmarket in an attempt to secure higher profit margins from a more premium positioning. It is understood that the new funding would be used to support this revised strategy.

The exact structure of a new investment has not been decided but is likely to involve the bread business being placed into a new company in which both Premier and another fund are roughly equal shareholders.

Such a task would be relatively simple following a reorganisation of Premier Foods' structure which means that the bread division now has a dedicated management team and a separate headquarters in High Wycombe, Buckinghamshire.

In a statement responding to Sky News's disclosure of its plans earlier this month, Premier said: "Premier Foods plc notes the recent press reports regarding potential investment in its Bread business.

"The Company confirms it has appointed Ondra Partners to assist in developing investment options for the Bread business, which include co-investment by a partner.

"There can be no certainty that a transaction will follow at any point in the future, but the Company will provide updates as appropriate.

Approximately 4,000 people work across the company's bread operations - almost half of Premier Foods' total workforce - which have been saddled with stubbornly high operating costs, poor industrial relations and the loss of a number of key contracts.

The new process comes a year after Premier Foods' previous chief executive hired Goldman Sachs (NYSE: GS-PB - news) to solicit bids for the entire bread business. An outright sale is not thought to be on the agenda in the present discussions.

Warburg Pincus, a buyout firm, has been a major shareholder in Premier Foods since 2009, and still owns about 17% of the company.

Premier, which makes Sharwoods sauces, Angels Delight desserts, Oxo gravies and Mr Kipling cakes, recently said the UK wheat harvest this year had been more productive than in 2012.

"Sales in the bread business (excluding Milling and a high cost to serve contract exited in April (Berlin: B2B.BE - news) ) were 1.5% behind the same period last year reflecting a slower start to the quarter as a result of the hotter July weather," it said.

"However, performance improved through the quarter, supported by progressively stronger customer partnerships. In particular, we are starting to benefit from substantial increases in space and distribution across both the larger supermarket and convenience formats of major customers."

Premier's bread business is understood to have secured more business from Tesco (Berlin: TCO.BE - news) in recent months, partly offsetting the loss of a contract with the Co-op last year.

Mr Darby, a former Vodafone and Cable & Wireless executive, was parachuted into the company as it grappled with efforts to repair its balance sheet following a debt-fuelled acquisition spree.

It has sold brands including Quorn, Crosse & Blackwell and Branston Pickle to raise funds but analysts continue to believe that a rights issue or another fundraising exercise is inevitable next year.

Spokesmen for Premier Foods and the prospective investors declined to comment on Wednesday.