Price hikes spell financial troubles for Premier

By Laura Crowley

- Last updated on GMT

Related tags: Cent, Premier foods, Stock market

Soaring commodity costs have sent Premier Foods share prices
tumbling and may cause the company to breach its banking covenants,
according to analysts.

Like many other bakery firms, Premier Foods suffered as EU wheat prices rose 35 per cent in 2007, according to the Confederation of European Food and Drink Industries (CIAA). Similarly, the cost of sunflower oil increased 25 per cent. Despite pushing up its prices, Premier did not weather the commodity storm well. Sales decreased 1.1 per cent in the bread bakeries segment to £398.4m (€589m) compared to £402.8m (€595.8m) in the same period the previous year, leading to a drop in organic profit of 49.9 per cent. With its share prices similarly suffering, media speculation is rife today that such troubles could force the UK bakery firm to sell off operations to keep its head above the water. Share prices The Daily Telegraph​ said shares closed at a record low of 97p yesterday down 9, after an unnamed shareholder sold 15m shares at 96p. It also reported that the company's share price fell more than 30 per cent earlier this month, and the London Stock Exchange has asked the Financial Services Authority to investigate the fall. While Premier has not released an official statement in response to recent speculation, previous rumours on its share prices and its possibility of breaching banking covenants led it to release a statement on the 8 February. The company said: "Based on our expected financial results for 2007, we are not in breach of our financial covenants as at December 2007 and, based on our latest financial projections, we do not expect to be in breach on an ongoing basis. "The board of Premier will announce its proposed final dividend for 2007 on4 March 2008, as part of its preliminary results announcement, in line with its normal practice." Soaring costs ​ This unfavourable environment has resulted from poor harvests damaging crops, competing demand for biofuels and the rising cost of oil. Last month, reported on Premier Foods' strategy of raising customer prices to combat high commodity costs and maintain margins. With this move, the company achieved sales growth of 6 per cent in its bread bakeries and 7 per cent it the cake division in 2007, but admitted that 'challenging conditions' would continue to put pressure on the company in 2008. Rumours suggest Premier is intending on rising prices again on its Hovis bread over the next two months. ​However, such a strategy is viewed with caution by shareholders. Indeed, Premier shares dropped more than 13 per cent to 163.5p as an immediate result. Also, regulators and retailers are opposed to the idea, and, in November last year, German retailer metro pulled all Kellogg products from its shelves, saying that the cereal manufacturer's price hikes were "absolutely not acceptable".

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