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.

Rising prices of wheat and lower demand for high-calorie goods like bread have made it tougher to turn a profit in the industry over the past few years.

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.