2nd UPDATE: Northern Foods, Greencore Agree To Merge

U.K.-based Northern Foods PLC (NFDS.LN), maker of Fox's biscuits, and Ireland's Greencore Group PLC (GCG.DB), which produces Weight Watchers meals, Wednesday agreed a merger to produce a powerful player in the production of chilled ready-meals and sandwiches with combined annual sales of around GBP1.7 billion.

The deal, structured as a merger of equals, will create a business called Essenta Foods, which will be headquartered in Dublin with an operational center in Yorkshire, England, the companies said.

"This combination has been obvious to both boards for a very long time. We have gone into it with positive intent," Greencore Chief Executive Patrick Coveney said. Coveney, who will be CEO of Essenta Foods, said the groups' chairmen first engaged on the issue in July, with full talks starting in September.

Northern Foods Chief Financial Officer Simon Herrick will be CFO of Essenta Foods. The board of directors will be drawn from both companies and Anthony Hobson, currently chairman of Northern Foods, will become chairman of the combined company, which will have a immediate primary listing in London and a secondary listing in Dublin.

News of the deal sent both stocks soaring. At 1048 GMT, Northern Foods jumped 11 pence, or 23.8%, to 56 pence, while Greencore rose 30 pence or 28.9% to EUR1.33. "The dust needs to settle on this deal but this is an exciting development for both the industry and the companies involved," Shore Capital analyst Clive Black said, raising the broker's rating on Northern Foods to buy.

"The marriage of the two leading chilled players in the U.K. market, the world's most advanced prepared foods' market, has been speculated for some years," Black added.

Greencore has moved away from commodity food businesses into chilled and convenience foods in recent years, and this part of the business now represents over 90% of group profit. It has operations in Ireland, the U.K., continental Europe and North America, producing prepared meals under the Weight Watchers and other brands, chilled sauces and soups, cakes and desserts, and sandwiches, prepared salads and sushi.

Northern Foods also produces ready meals, sandwiches, salads and chilled pizzas for U.K. supermarkets, including Tesco PLC (TSCO.LN) and Marks & Spencer Group PLC (MKS.LN), and produces its own branded products including Fox's biscuits and Goodfella's and San Marco pizzas.

Coveney said he is confident the merger, which does not plan to dispose of any assets, will be cleared by antitrust regulators. Herrick added the group sees the merger as a platform for growth. " We are a portfolio business and it gives us an opportunity to create value by building the brand."

Coveney said the company would concentrate on integrating the current assets in the short term, but noted the group has an investment grade credit rating and a GBP750 million credit facility at its disposal for acquisition opportunities.

Still, Coveney said overlaps do exist and he didn't rule out "modest" job cuts among the combined 17,000 staff. "There are some implications," he said.

The deal, which the companies hope to complete in the second quarter of 2011, will generate annual cost synergies of GBP40 million within three years--GBP15 million in overheads, GBP20 million in purchasing and supply chain and GBP5 million in financing. However, the cost of the synergies will be GBP45 million over the same period, two-thirds of which will come in the first year.

Essenta Foods will be tax-domiciled in Ireland, with taxable profit there at almost zero. Herrick said the group will probably not pay cash tax for three years.

Coveney said the transaction--which will need to be cleared by shareholders of both companies and courts in the U.K. and Ireland, as well as antitrust regulators--has already received support from 30% of Greencore's shareholders and nearly 12% of Northern Foods' shareholders, with the largest seven combined shareholders having given their backing already. Under the terms of the deal, Northern Foods shareholders will receive 0.4479 of a new Greencore share for each Northern Foods share held.

Northern Foods was advised by UBS and Greencore was advised by Barclays Capital.

Separately, Greencore reported its full-year results Wednesday. It swung to a pretax profit of EUR30.3 million compared with a loss of EUR23.4 million a year earlier, on a 7% rise in sales to EUR856 million boosted by its convenience foods division. Net profit came to EUR33.9 million from a loss of EUR9.9 million.

It said trading early in the new fiscal year is "encouraging", albeit that sales growth is at more modest levels than a year earlier.

-By Steve McGrath, Dow Jones Newswires; 44-20-7842-9284; steve.mcgrath@dowjones.com and Simon Zekaria, Dow Jones Newswires; +44 207 842-9410; simon.zekaria@dowjones.com

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