Testing times for Greencore’s management
The €21m write-off in its Scottish mineral operations is the latest blow to a group with ambitions to become a big player in the US convenience food sector.
The group is already one of Europe’s leading producers of convenience foods since acquiring the British-based Hazlewood group in 2001.
It is also an established ingredients and agribusiness supplier with operations in Ireland, Britain, the Netherlands and Belgium.
It accounts for one quarter of all sandwiches consumed in Britain, producing around 250 million a year. It is also Britain’s largest Christmas cake maker, with a 33% market share, and the biggest producer of customer-branded mineral water, selling 190m units.
More recently it announced a strategic move into the US where it has acquired Home Made Brand Foods, based in Massachusetts for $44m (€28m). It manufactures and supplies a range of fresh food products, including freshly prepared meals, and is predicted to generate over $40m in sales this year.
The move cost $44m, while a further $10m will be payable depending on its performance this year.
Ironically, the fraud at the Scottish mineral water business amounts to $33m, not too far short of the price paid for its first US venture. That upset aside, the group looks to have signalled another strategic step forward.
Perhaps it was inevitable that acquiring Hazlewood in 2001, which was a highly diversified and pretty loosely managed set of disparate businesses, would deliver some shock to Greencore’s corporate system.
PricewaterhouseCoopers is now facing a probe into its failure to spot a €21m fraud and is likely to lose the audit contract.
Unfortunately for Greencore the €21m write off comes on top of €180m write downs in the three years to end of September 2006, as the group grappled with Irish Sugar’s closure.
Prior to that it spent some years writing off non-core investments in Hazlewood
Further back it also had to cut its losses on a number of investments, including a significant stake in US sugar group Imperial Holly, as it tried to find new income streams ahead of changes to the EU sugar regime.
To add to its woes property developer Liam Carroll bought financier Dermot Desmond’s 22% stake in the company for €170m some years ago, and has since built that stake up to over 29%.
Despite that overhang and the significant write offs over the years, Greencore’s shares rose to their highest level in 2007 when they peaked at €5.60.
No doubt its land banks in Mallow and Carlow, a legacy of the Irish Sugar days, helped boost the shares last year, before the property market soured. Today they are down to €2 and likely to stay weak for some time.
However the group’s customer base for its convenience food range in Britain is very strong. Key customers include Tesco, Asda, Sainsbury’s and M&S.
Overall, the major multiples account for 68% of the group’s sales, with small outlets including Spar, Esso and British Airways making up the rest of its turnover.
That division accounts for nearly 70% of profits.
The malting and property plays offer varying degrees of alternative earnings, but the convenience foods business holds the key to the group’s long term growth.
Greencore’s intention is to immediately transfer the capability it acquired in Hazlewood to the US and to broaden the group’s earnings base through development of the US convenience food sector.
If it succeeds, then the shares will turn out to have been a good long-term bet. But any further set backs to that plan now would severely undermine the credibility of management and group.
