Deutsche Bank has raised its price target on Premier foods (LSE:PFD) to 240p and kept a buy rating after the Mr Kipling maker agreed to acquire Merchant Gourmet for £48 million.
The deal, announced yesterday, gives Premier a brand that made around £28 million of sales last year from its ready-to-eat pouches of grains and pulses.
On that basis, the purchase price equates to 1.7 times revenues.
Deutsche said the multiple of cash profits, once cost savings are factored in, works out at a more reasonable high single-digit. The acquisition is expected to lift earnings in the first full year.
Merchant Gourmet employs 25 people, all of whom will transfer to Premier. With manufacturing outsourced to third parties, the integration looks relatively straightforward.
Premier is betting it can use its marketing muscle and supermarket relationships to accelerate sales.
The brand gives it a bigger foothold in the “healthy and convenient” meals space, a category that has been growing faster than many traditional grocery lines.
Deutsche’s Damian McNeela said Premier has a “proven branded growth model” that it can apply to Merchant Gourmet, echoing the success it has had in reinvigorating Sharwood’s and Ambrosia.
The shares were flat at 188.2p.