In 1950, Bernard Matthews, armed with an initial investment of £2.50, 20 turkey eggs and a second-hand paraffin incubator, hatched what would become a multimillion-pound household name. Last week, Ranjit Singh Boparan, owner of the vast 2 Sisters chicken empire, acquired the assets of the turkey giant from administration. We address the key questions.
What led Bernard Matthews to the point of collapse? Is Ranjit the man to return it to its former glory? And what happened behind the scenes of the controversial pre-pack deal?
What went wrong at Bernard Matthews? When Bernard Matthews was returned to private ownership in November 2000 after 30 years as a listed company it was valued at £232m.
Fast forward almost 16 years and the business was worth “virtually nothing” according to one senior dealmaker. Matthews had transformed the industry by making turkeys affordable for millions of working class households. Sales hit £480m and profits were close to £40m in 2005.
But the combination of a Jamie Oliver campaign against Turkey Twizzlers, a notorious video of staff playing baseball with live turkeys and the slaughter of 160,000 birds after an outbreak of avian flu wiped £131m from the top line and sent the business spiralling to a £77m loss by 2007.
It had become one of the country’s least respected or trusted brands, according to a YouGov poll that year.
A senior City source believes bird flu was the killer, though not so much contracting it as the way it happened - the company regularly imported turkeys from Hungary, where an identical strain of the virus was discovered.
”The whole image of Bernard outside Turkey Hall saying ‘bootiful’ with English turkeys running about was tarnished”
“A lot of housewives and consumers were shocked by that,” the adviser adds. “The whole image of Bernard outside Turkey Hall saying ‘bootiful’ with English turkeys running about was tarnished. “It became apparent they were actually being intensively farmed in Eastern Europe. For many consumers that was a real no no.”
As part of a turnaround strategy, management hoped to double turkey consumption in the UK by 2020, with Marco Pierre White brought in as brand ambassador.
Another City corporate finance adviser says the business didn’t properly capitalise on marketing turkey as an alternative protein. “Team GB had been told to eat turkey in 2012 Olympics as it had a better fat content to energy provision quota than chicken,” he says. “They should have jumped on it, sponsored the team and tried to make it work for them.”
The recovery never came.
Turnover slumped to £276.7m in the year to 28 June 2015, net debt was £77m and there was no sign of profits returning after 10 years of consecutive pre-tax losses, despite positive noises by CEO Rob Burnett.
Private equity owner Rutland Partners, which invested £25m in the business in 2013, decided to cut and run.
“The brand lost its way, the business failed to capitalise on a shift to own label, and it failed to make turkey a mainstream competitor to chicken,” adds a senior turkey industry source. “Like it or not, turkey is still very much a niche protein, and supermarkets still import a lot of cheap distressed turkey.”
What does Singh bring to Bernard Matthews and can he rebuild the legacy? The team behind Singh claims, as well as preserving 2,000 jobs and 50-plus farms, the owner of 2 Sisters has saved Christmas. And given Bernard Matthews holds 40% of the festive market and processes seven million turkeys a year, advisers in the City agree. “If you wanted a British turkey this year then this deal had to happen,” one says.
It’s a stance echoed by the wider turkey sector. “We need Bernard Matthews in the industry,” says British Turkey Federation chairman Paul Kelly, who adds the remainder of the sector would not be able to cope with demand without the business - opening the door to cheap imports.”
Singh’s track record of buying struggling producers and making them work includes the takeover of the Vion UK poultry business in 2013. However, making Bernard Matthews profitable could “take some doing” one City source says. “It is a very seasonal business, and that is hard to get right. Operationally, these businesses need a lot of investment to really step change their profitability.”
To be bold enough to make the investment needed in the farms would have been pretty heroic in terms of a private equity investor, but with Ranjit’s experience in the industry he will have a better shot.”
”Ranjit is not just a bruiser; he is very thoughtful about how he addresses how a business can make money.”
Another dealmaker questions if Singh is buying a market position rather than a brand. “He will make it work as he is a good operator and he will build an integrated business. If he invests in the turkey farms he will have overcapacity there which can be converted for use in chicken. Ranjit is not just a bruiser; he is very thoughtful about how he addresses how a business can make money.”
Cost savings, buying power and payment terms will all likely form a central part of the turnaround plans. Singh will quickly identify head office costs which can be stripped out and will use the might of 2 Sisters to buy feed at lower prices than Bernard Matthews could, the source adds.
“Ranjit will think he can do a much better job running Bernard Matthews. He will also push out the time he pays creditors and suppliers. That exercise alone generates a lot of cash.”
Why was the deal done through Boparan Private Office? One City source says the debt in 2 Sisters would have covenants and restrictions that would have made it more difficult to get the deal over the line. “The deal was done through the private office to allow him to move quickly without bureaucracy,” he adds. “He needed to move fast.” Regulatory concerns may also have influenced the move. “Ranjit may think it pre-empts any possible concerns from the CMA if done through the family office rather than 2 Sisters,” another adviser says.
Will the CMA investigate the deal? This depends on whether the watchdog takes the view that chicken and turkey is simply classed as protein. 2 Sisters is the biggest player in UK chicken, holding about 40% of the market and generating revenues of more than £2bn a year in the protein division. It has now acquired the market leader in turkey. Singh will argue without his intervention Bernard Matthews would go bust, so if the CMA probes the deal it would likely face heavy criticism. “Chicken and turkey are fundamentally different markets,” the City insider says. “The barriers to the industry are not that high, you can import turkey into the UK easily. And the competitive set is very broad. If the CMA calls it in then we all might as well give up and go home.”
Why is the pre-pack deal controversial? Buying Bernard Matthews from administrators meant Singh took control of the assets and left the liabilities behind, including the pension scheme and £16.7m deficit, which have been jettisoned to the Pension Protection Fund. The Pensions Regulator is thought to be weighing up an investigation of the arrangement, with Frank Field MP, chairman of the commons Work and Pensions Committee, calling for more scrutiny of business owners who dump liabilities into the PPF lifeboat in the wake of the BHS scandal.
“If the CMA calls it in then we all might as well give up and go home.”
A spokesman for the Boparan Private Office claims a solvent deal for the whole of Bernard Matthews was turned down by Rutland Partners, leaving the administration route as the only option. Rutland refuses to comment. A source close to the deal counters Singh’s initial offer “wasn’t compelling”. Rutland thought it could achieve better value by breaking up Bernard Matthews and selling the cooked meat business, some farms and slimming down turkey production, the source says. Singh ultimately returned with a more attractive offer once the liabilities were off the table, which persuaded Rutland to do the deal, he adds. The details won’t be clear until Deloitte finishes its report into the administration, but Rutland, which put a number of financial instruments in place when it first invested in Bernard Matthews, is expected to recoup some of its losses as the number-one ranking creditor.
What does the future hold for the current management? At the time of going to press, The Grocer understands CEO Rob Burnett is still in post, and it’s unlikely Singh will make wholesale changes to the management structure immediately with Christmas on the way. However, it doesn’t look promising for the long term for some of the management. “He will be selective on changes,” an industry source adds. “Ranjit is very hands on and there will be two or three senior roles he will want to stamp his authority on. Some of the management may not be up to the challenge.”
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