Cig­a­rette sup­ply gi­ant sends SOS cash call

The Sunday Telegraph - Money & Business - - Front page - By Ben Mar­low and Ash­ley Arm­strong

THE UK’S big­gest cig­a­rette sup­plier has stepped up at­tempts to find new back­ers amid a loom­ing dead­line to re­pay tens of mil­lions of pounds to some of the world’s big­gest to­bacco man­u­fac­tur­ers.

Palmer & Har­vey, one of the UK’S largest pri­vate com­pa­nies with around 4,000 em­ploy­ees, is un­der­stood to need around £50m of fresh funds by the end of Septem­ber.

It has launched a for­mal search for new out­side in­vestors, led by ad­vis­ers at PWC, trig­ger­ing spec­u­la­tion that Sains­bury’s and the Co-op could make a move in re­sponse to a se­ries of big deals in the gro­cery in­dus­try.

How­ever, sources close to the talks sug­gested bid­ders were be­ing put off by the size of the com­pany’s debt pile, and the amount of money that could be re­quired to up­grade its vast fleet of de­liv­ery lor­ries. The com­pany’s ul­tra­slim mar­gins are also de­ter­ring in­ter­est. De­spite rack­ing up £2.5bn in sales last year, Palmer & Har­vey made just £618,000 in profit af­ter in­vest­ing in two de­pots.

It is un­der­stood to owe around £240m to Im­pe­rial To­bacco and £160m to Ja­pan To­bacco. Fail­ure to stump up the cash could force the cig­a­rette gi­ants to step in with a res­cue bid, just months af­ter they backed a re­fi­nanc­ing.

Sources said that the pair would need to en­sure the fu­ture sup­ply of their to­bacco prod­ucts across the UK. Palmer & Har­vey, which is led by for­mer Tesco ex­ec­u­tive Tony Reed, owns 1,300 ve­hi­cles, serv­ing around 90,000 shops across the coun­try, which would be al­most im­pos­si­ble to re­place.

The sup­plier has been hit hard by the seis­mic changes sweep­ing through the gro­cery in­dus­try. Its largest cus­tomer, Tesco, is pur­su­ing a £3.7bn takeover with ri­val whole­saler Booker, while an­other big client, the con­ve­nience store chain Mc­colls is re­tender­ing its con­tract, threat­en­ing two ma­jor sources of in­come.

In­dus­try ex­perts likened it to the res­cue deal of mu­sic re­tailer HMV in 2013, which was sup­ported by en­ter­tain­ment gi­ants Uni­ver­sal and Warner Bros as a way of guar­an­tee­ing a venue for mu­sic artists to sign and pub­li­cise their new records.

Whole­salers’s prof­its have been fur­ther squeezed this year as su­per­mar­kets and con­sumer goods gi­ants have looked to re­cover costs that have re­sulted from the weaker pound.

Ear­lier this year Palmer & Har­vey se­cured a re­fi­nanc­ing deal with the Ri­zla and Camel cig­a­rette maker af­ter ur­gently need­ing to re­place credit lines from GE Europe, which has pulled out of the UK mar­ket.

Tesco, which ac­counts for 40pc of P&H sales, ex­tended its con­tract with the whole­saler to give it more cer­tainty of its fu­ture as part of the res­cue fi­nanc­ing pack­age.

Sources close to Sains­bury’s claimed it is more likely to pur­sue a joint-buy­ing agree­ment, which would give both busi­nesses stronger pur­chas­ing power with large con­sumer goods com­pa­nies such as Unilever. The su­per­mar­ket chain is also weigh­ing a £130m takeover of con­ve­nience whole­saler Nisa, though that could be blocked by its smaller ri­val’s share­hold­ers.

The Com­pe­ti­tion and Mar­kets Au­thor­ity re­cently warned that Tesco’s takeover of Booker could threaten P&H’S busi­ness model and “im­pact its abil­ity to com­pete”.

In­dus­try ex­perts said that Tesco could be forced by the com­pe­ti­tion watch­dog to ex­tend its con­tract with P&H to en­sure its sur­vival.

A P&H spokesman said that “hav­ing re­ceived some ex­pres­sions of in­ter­est, we are now go­ing through a process of ex­plor­ing all of our strate­gic op­tions”.

“Our in­dus­try con­tin­ues to go through sub­stan­tial change so nat­u­rally we are re­view­ing the op­tions avail­able to us to en­sure that we are in the best po­si­tion to cap­ture the op­por­tu­ni­ties pre­sented,” he added.

Tony Reed, chief ex­ec­u­tive of Palmer & Har­vey, was ap­pointed last Oc­to­ber af­ter a long ca­reer at Tesco

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