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Northern Foods sells chilled distribution business

By Ahmed ElAmin , 31-Jul-2006

In a further restructuring Northern Foods today announced it will sell its chilled distribution business for £51.2 million.

Falling margins and sales have hit profits at the ailing British food manufacturer. Earlier this month Northern Foods announced a drastic plan to sell around 40 per cent of its business in a bid to refocus efforts on core brands.

The company today said it had reached agreement for the proposed sale of the business and assets of NFT, its chilled distribution business, to a new group formed through a management buyout and backed by Phoenix Equity Partners.

 

The proceeds will be £51.2m, made up of £44.5m cash on completion, together with a loan note of £6.7m payable to Northern Foods not later than 12 months after completion.

 

The new company will use the name NFT Distribution Holdings Ltd.

 

NFT was established by Northern Foods in 1979 and provides chilled distribution services to the food sector. The unit had a turnover of £111.4m for the year ended 1 April 2006, with an operating profit of £3.9m.

 

Chilled foods are characterised by short shelf lives and strict temperature regimes.

 

NFT deals in distributing such products from manufacturing sites to retailers' regional distribution centres. NFT has a network of eight sites across the UK, made up of dedicated and shared facilities. About 89 per cent of the unit's business is from other food companies.

 

Northern Foods said the majority of the proceeds will be used to reduce debt. A payment of £10m will be made to the company's pension scheme.

 

The disposal of NFT is the first sale under Northern Foods' wider restructing programme which was announced on 31 May 2006. Northern Foods plans to eventually sell businesses amounting to 40 per cent of its revenue in order to concentrate on fewer, core categories.

 

The manufacturer said it is struggling amidst sliding sales and margins as its supermarket clients adopt tough bargaining positions on prices and consumers change preferences.

 

Higher costs, particularly for energy, combined with weak pricing, in a number of what the company calls "increasingly discounted and promoted markets" also hit results. About 75 per cent of the company's revenue comes from the five largest retailers in the UK.

 

Earlier this year the company announced profit before tax and restructuring items was £45.1m, compared to £62.2m in the previous financial year. The loss after accounting for restructuring was £5m, compared to a profit of £22.8m the previous year.

 

The avian influenza scare is causing fluctuations in the demand and price for poultry in the EU, according to the latest agricultural forecast by the European Commission.

 

The report provides an insight into the forecast supply and prices for a wide variety of agricultural products processors use to make their products. Overall the Commission forecasts that the prices for cereals will largely remain stable, while demand for meats will continue to rise, possibly pushing up prices.

 

In the case of poultry, producers have managed to keep the glut on the European market in storage, helping to push prices up to about the same as it was a year ago, according to the report.

 

The average EU price in June 2006 for whole birds was nearly at the same level as in June 2005 and 6.4 per cent higher than the more representative average paid from 2001 to 2005. This is a rebound from the March 2006 price of 131.3 €/100 kg, a level which was 9.8 per cent lower than the five-year average.

 

"Based on current market indications, the short-term disruption linked to avian flu is assumed to have little impact on the medium-term outlook that should remain relatively positive as competitive prices with respect to other meats, strong consumer preference and increased use in food preparations should continue to play in favour of poultry," the report stated.

 

The Commission's experts forecast that per capita consumption will increase to about 24.1 kg/year by 2013, from around 23.2 kg/year in 2005, with a stronger growth in the new member states, where poultry meat should benefit from a growing consumer preference.

 

Poultry meat production remained stable in 2005 but is expected to decline slightly in 2006 in response to lower demand due to the avian influenza scare, the Commission reported.

 

The H5N1 influenza strain was detected for the first time in European wild birds in January 2006. Precautionary and control measures were adopted both at national and EU level to prevent a further spreading of the disease. A limited number of France and the Netherlands poultry population has been vaccinated.