Kingsmill owner AB Foods buys Hovis to create UK bread powerhouse

By James Davey

LONDON (Reuters) -Associated British Foods has agreed to buy Hovis, giving it another big UK bread brand on top of Kingsmill so they can better compete in a market that has seen a decline in demand for the packaged sliced loaf.

Associated British Foods said on Friday it would acquire the 135-year old Hovis brand from private equity firm Endless, bolstering the group's Allied Bakeries unit which in addition to Kingsmill owns the Sunblest and Allinson's brands.

The purchase price was not disclosed but a person with knowledge of the situation told Reuters it was about 75 million pounds ($102 million).

AB Foods said in April it was "evaluating strategic options" for Allied Bakeries, saying it continued to face a "very challenging market". The group said in May it was in talks with Endless about a potential deal.

In recent years, Allied Bakeries and Hovis, which are both loss-making, have been hit by a decline in demand for pre-sliced, packaged bread, reflecting increased competition from speciality bread producers as well as changing consumer tastes with more opting for diets with lower amounts of carbohydrates.

AB Foods said the deal, combining two of the UK's best known bread brands, will bring together production and distribution activities, driving significant cost synergies and efficiencies.

It said the combined business will be better placed to compete effectively and deliver product innovation in the segments of UK bakery that are growing, such as sourdough.

“This transaction will create a UK bakeries business that is both profitable and sustainable over the long term," CEO George Weston said.

The deal is subject to regulatory approval. It will likely face a lengthy probe by the competition authorities given the combined group's market share.

Hovis has about 18% of the pre-sliced, packaged bread market, while Allied Bakeries has about 6%. Industry leader Warburtons has about 28%.

However, the figures for Hovis and Allied Bakeries exclude bread they manufacture for own-label customers.

The regulator, the Competition and Markets Authority, is, however, under pressure from the UK government to support growth.

"While the deal would face regulatory scrutiny, precedents in similar industries do suggest an approval is possible as one company’s survival is at risk," analysts at Panmure Gordon said.

AB Foods also owns major grocery brands such as Twinings tea, Jordans cereals and Ovaltine drinks, the Primark clothing chain, and sugar, ingredients and agriculture divisions.

In April, the group reported a 10% fall in first half profit, mainly reflecting a weak performance and outlook in sugar. Its shares are, however, up 11% so far this year.

($1 = 0.7378 pounds)

(Reporting by James Davey in London and Yamini Kalia in Bengaluru; editing by William James and Susan Fenton)