Greencore has finally agreed to buy rival Bakkavor in a deal worth £1.2bn.
Bakkavor had previously rebuffed two offers from Greencore, including a £1.1bn approach last month.
The merger will create a convenience foods giant with combined turnover of about £4bn.
The deal will see Greencore shareholders own 56% of the combined group, while Bakkavor shareholders will take 44%.
Bakkavor shareholders will receive 85 pence and 0.604 Greencore shares for each share they hold. The offer represents a 33% premium to the share price on 13 March when an initial offer was made public.
Bakkavor’s share price is up over 6% since the deal was announced on Wednesday morning, bringing its market value to just over £1bn.
Read more: What would a mega-merger mean for Bakkavor and Greencore?
Its founders, the Gudmundsson brothers, still control 49% of the company and will join the board of the combined group as non-executive directors.
“The boards of Greencore and Bakkavor see compelling strategic, commercial and financial rationale for the possible offer and believe it provides a highly compelling value creation opportunity for stakeholders in both Bakkavor and Greencore,” Greencore said in a statement.
Greencore and Bakkavor are currently undertaking an exercise to quantify the synergies, which they will publish soon.
The deal includes a right to further cash for Bakkavor shareholders if its US business is sold before July next year.
Tania Maciver, an equity research analyst at RBC Capital, said it is unlikely any material competition concerns will arise from the deal.
“While there is some overlap in certain UK convenience food categories, such as chilled ready meals, salads, and soups, both companies operate in what remains a highly fragmented market. To put it into perspective, the total UK convenience food market is valued at around £54 billion, and even combined, Greencore and Bakkavor individually account for less than 4 per cent of this total market.”
Maciver estimated that deal could produce synergies of between 2% and 4% of Bakkavor’s sales over a three-year period.
Russ Mould, investment director at AJ Bell, said there was ”strategic merit” in merging the two companies given they are both big names in the UK ready meal market. “Greencore wants a bigger slice of the pie and devouring Bakkavor would take the business to the next level.”
Yet he warned: “Transformational acquisitions are always harder work than you think, so simply parking Greencore and Bakkavor together is not a guaranteed ticket to success.”
‘Greencore is on a roll’
For Greencore, the deal marks the capping of a sizeable turnaround under CEO Dalton Philips with its share price more than doubling since he took over.
Its share price was up another 5% yesterday after it raised its annual earnings forecast due to “strong revenue and volume momentum” in the second quarter.
The company is benefiting from more demand for on-the-go food as workers return to office after the pandemic.
“Greencore is on a roll,” said Mould after the earnings forecast. “Its bread and butter of supplying convenience foods is going exceedingly well and profit is now set to beat previous expectations.
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