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Associated British Foods (ABF) is to acquire the Hovis bread business from UK headquartered private-equity firm Endless.
ABF confirmed the deal today (15 August), ending months of speculation over the UK-listed company’s plans for its own bread division, Allied Bakeries, the Kingsmill and Sunblest brand owner put up for review in April.
However, rather than opting to sell Allied Bakeries after ABF said in April that the division was facing a “very challenging market”, the London-listed company is combining it with Hovis to “create a profitable UK bread business that is sustainable over the long term”.
Those comments came from ABF’s CEO George Weston, who added in a statement: “Supporting the Hovis and Kingsmill brands with well-invested and efficient operations will also enable innovation and growth.
“This solution will create value for shareholders, provide greater choice for consumers and increase efficiencies for customers.”
Financial terms for the transaction were not disclosed by ABF as it said it had “reached an agreement to acquire Hovis”, subject to regulatory approval. Endless bought the business in 2020.
At the time, Hovis was 51%-owned by US investment firm The Gores Group and UK food company Premier Foods, the owner of the Mr Kipling cakes brand. Jefferies International estimated the deal value at £75m ($101.6m at today’s exchange rate) in terms of what it deemed in 2020 as “implied gross proceeds”.
Endless provided a statement in response to Just Food’s request for comment, noting the deal will need to be approved by the UK’s Competition and Markets Authority (CMA).
Aidan Robson, a managing partner of Endless, said: “We are proud of the journey we’ve shared with Hovis to date, supporting this historic brand in a highly competitive and challenging market. The transaction with ABF represents an opportunity to create a platform for long-term sustainability in the bakery sector for the benefit of retailers and consumers.
“While we work towards achieving CMA clearance of the transaction, our focus remains on Hovis to continue delivering exceptional products and service to its customers.”
When ABF revealed the review of Allied Bakeries in April in its financial results briefing for the 24 weeks to 1 March, the Primark clothing stores owner said the bakery division had added to the group’s operating losses amid “lower” volumes and sales.
ABF added more commentary today: “Profitability at Allied Bakeries has been increasingly challenged in recent years by a decline in demand for pre-sliced, packaged bread and a loss of scale in Allied Bakeries’ nationwide distribution network serving the major retailers with daily delivery of bread and bakery goods.”
However, it added: “The acquisition [Hovis] will combine the production and distribution activities of the two businesses, driving significant costs synergies and efficiencies…
“The combined business will be better placed to compete effectively and to establish a stable platform for product innovation in the segments of the UK bakery category that are growing as a result of changing consumer tastes and needs.”
James Watson, a UK partner at consultancy Argon & Co., said: “The Hovis-Kingsmill merger is a clear sign of the pressures facing the UK bakery sector. With inflation driving up costs and bread consumption in steady decline, consolidation was always a question of when, not if.
“The deal gives ABF a new market leader with 41% share, overtaking Warburtons’ 34%. But behind the headline is a tough reality: both businesses have been making unsustainable losses. The real prize here is efficiency – rationalising overlapping bakery networks and cutting costs in procurement, logistics, and manufacturing.”
ABF said the forward plans for the combined business include the “improvement in existing products and expansion into new product ranges”.
Allied Bakeries also produces the Allinson’s bread and flours brand. The division of ABF also supplies UK retailers and supermarkets with private-label bread products.
ABF does not break down the financial performance of Allied Bakeries or for other food brands within its grocery reporting unit, which includes Twinings tea and the Patak’s and Blue Dragon sauces lines.
Group results for the 24 weeks to 1 March showed a 2% decline in sales to £9.51bn, while adjusted operating profit dropped 12% to £835m. Profit before tax fell 21% to £692m with an EPS decrease of 8% to 83.6 pence.
Shares in ABF were little changed at 2,270 pence in London today following the Hovis announcement.
Watson at Argon added: “Execution will be everything. Disrupting existing customer relationships now, while both brands are losing share, would risk compounding the problem.
“Longer term, the challenge is to stop managing decline and start building momentum. That means addressing structural issues in the bread market and responding faster to shifting consumer trends – whether that’s health, speciality products, or premium lines.”
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