Greencore Group PLC (LSE:GNC) and Bakkavor Group PLC (LSE:BAKK) have struck a deal to merge after a "song and dance" over the price, but while the deal has merit, analysts said things may not be so simple.
Under the agreed structure, sandwiches, wraps and sushi maker Greencore will gobble up its pizzas, dips and desserts making rival Bakkavor in £1.2 billion takeover deal.
This follows the last proposal on 7 March that was rejected by Bakkavor as it "significantly undervalued" the company, with the new offer worth 200p per share and including a new element for a contingent value right if its US business is disposed before June 26.
Analysts at Jefferies said they were "encouraged that a route forward has been found in relatively short order, and are increasingly warming to the value of a GNC/BAKK combination".
"We think the potential synergies (from scale and improved utilisation) could be sufficient to make this a firmly accretive deal."
Greencore, said analysts at Hargreaves Lansdown, "clearly believes it has the winning recipe for success and is keen to expand further into the food service market".
The FTSE 250 group already supplies major supermarkets in the UK and has seen a surge of appetite for its food-to-go ranges with sushi sales in particular doing well, with growth of around 15%.
"There is strategic merit in parking the two companies together," says Russ Mould, investment director at AJ Bell.
After Greencore was derailed by the pandemic, its been on a better run lately, including a strong update this week.
However, said Mould, "transformational acquisitions are always harder work than you think, so simply parking Greencore and Bakkavor together is not a guaranteed ticket to success."
RBC Capital analyst Tania Maciver said she anticipates that a formal offer will be made prior to the 11 April deadline.
"The combination of GNC and BAKK would be positive in our view, creating a UK convenience food business with combined revenue of circa £4 billion, should a formal offer be presented."
The new offer translates to an equity value for Bakkavor of around £1.22 billion compared to a previous offer of around £1.13 billion, roughly 12 time 2025E underlying profit (adjusted EBIT), just ahead of peers at 11.7x, Maciver said.