Cigarette supply giant sends SOS cash call
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