Following weeks of rumours, Associated British Foods (ABF) announced today that it has agreed a deal to buy bread brand Hovis from private equity firm Endless, bolstering the group’s loss-making Allied Bakeries unit, which owns the Kingsmill, Sunblest and Allinson’s brands.
ABF stated in April that it was “evaluating strategic options” for Allied Bakeries, with it later saying it was in talks with Endless about a potential deal. The company reaffirmed today that profitability at its bakery unit 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, which serves the major grocery retailers.
The acquisition will combine the production and distribution activities of the two businesses, with ABF saying it will drive “significant cost synergies and efficiencies, to create a profitable UK bread business that is sustainable over the long term”.
It added: “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. This will include improvement in existing products and expansion into new product ranges.”
The purchase price was not disclosed, but previous reports had suggested a figure of around £75m.
Completion of the transaction is subject to regulatory approval, as it will bring together the UK’s second- and third-largest suppliers of packaged bread to supermarkets.
The overall bakery market is estimated to be worth approximately £5bn in annual sales, with the equivalent of 11 million loaves being sold each day. Warburtons is the largest bakery group in the UK, with an estimated 34% share of the branded wrapped sliced bread sector, with Hovis on 24% and Allied Bakeries on 17%.
While the combined group will have the largest share of that segment of the market, Warburtons’ overall turnover will remain higher due to the breadth of its product range.
“This transaction will create a UK bakeries business that is both profitable and sustainable over the long term,” said George Weston, Chief Executive of ABF.
“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.”
Accounts filed at Companies House last month showed pre-tax losses at Hovis increased from £4.8m to £8.7m over the year to 28 September 2024, on revenue down 8.0% to £439.6m amid “tough trading conditions”. Underlying profits (EBITDA) at the struggling baker slipped from £20.9m to £18.7m, which Hovis said was the result of the revenue decline and higher distribution costs.
Trade publication The Grocer recently reported that Hovis has been losing significant distribution, with over 20 lines disappearing from shelves across the traditional big four supermarkets in recent weeks. The publication quoted a company spokesperson as saying that it was “aware of some adjustments to Hovis product lines in certain stores. We remain fully committed to working collaboratively with our retail partners to grow our mutual businesses.”
ABF does not disclose details of Allied Bakeries’ financial performance, but in a recent presentation to analysts, the company described losses at the unit as unsustainable.
NAM Implications:
- An inevitable consequence of lockdown fallout.
- A reaction to changing health trends.
- And more demanding consumption.
- Hopefully, scale will enhance the combined bottom line.
- And avoid the need to ‘cut-to-fit’ the combined businesses…
