Convenience food group Greencore made the unexpected announcement this week that it will sell its entire US business to Illinois-based Hearthside Food Solutions in a $1.1bn (€930m) deal. It must be remembered it is less than two years since Greencore laid down a signal of intent in the US market with the $750m (€650m) acquisition of Peacock Foods. This deal almost doubled the size of Greencore’s US operations at the time and was described by the company as being “transformative”.

So how is it that less than two years later, Greencore is selling its entire US business and drawing a close to its foray into the US market? In a call with investors on Monday morning, Greencore chief executive Patrick Coveney shed some light on the deal when he revealed Hearthside made an unsolicited approach in late August/early September to buy the company’s entire US operations.

The Greencore boss described the approach as a “compelling strategic proposition” from Hearthside that would combine the two businesses to establish by far the largest contract food manufacturer in the US.

The $1.1bn deal agreed with Hearthside values Greencore’s US business at just over 13 times earnings (EBITDA), which is more than the 10 times multiple that Greencore paid for Peacock Foods in November 2016. It is also a premium on the $979m net asset valuation that Greencore placed on its entire US operations last March.

“Reflecting on the offer, we felt it was unambiguously in the best interest of shareholders for us to accept this immediate realisation of value of our US business right now rather than trying to deliver that value with the organic plan we had over the next three to six years,” said Coveney.

Regret

There’s a hint of regret in this deal for Coveney, who clearly had invested a lot of personal effort in building Greencore’s US operations to its current size. While Greencore has been in the US since 2008, it has only been operating at real scale for two years since the Peacock acquisition – a deal which Coveney himself had championed.

Instead, Greencore will now use the proceeds from the sale to return £509m (€578m) to its shareholders by paying out a special dividend of 72p per share. This will effectively see Greencore shareholders get back the £439m (€500m) they stumped up to finance the Peacock deal in 2016, plus a bit more.

The remaining proceeds from the sale, some £293m (€333m), will be used to pay down debt and leave the business with a much more flexible net debt to earnings ratio in the range of 1.5 to two times going forward.

When the dust settles on this sale, Greencore will be a much smaller company (more than 40% smaller) with annual revenues of about£1.5bn (€1.7bn). It will also be solely focused on the UK market again. Coveney sought to reassure investors this week by playing up the growth prospects of the UK convenience food market, which has delivered a compound annual growth rate of 23% since 2011 and allowed Greencore to take a 60% share of the market.

However, when pushed on the underlying growth of the UK, Coveney admitted it was likely to be much more modest in the years ahead.

Greencore

“The explosive level of growth that saw us go from a 22% market share in 2011 to a 60% market share today and gave us that 23% compounded growth rate is not going to be replicated in the food-to-go market in the next five years,” said Coveney.

Instead, the Greencore boss said a mid-single-digit growth figure was more likely in the years ahead but did foresee acquisition opportunities down the line in the UK.

“The consolidation you’ve seen in the grocery retail and wholesale sector over recent years will be replicated in the contract manufacturing sector also. Our track record and stronger financial position will hopefully allow us to go after that consolidation,” said Coveney.

Reduced force

Despite the optimism, Greencore still looks like a reduced force without its US arm. While the US market has given the company headaches in the past, Coveney had overcome significant hurdles to build the US operations to a scale he believed would be the engine for future earnings growth.

Now that it is a smaller UK-focused business once more, could Greencore be a takeover target? It would still command a sizable price tag but its market-leading position and manufacturing scale would make it an attractive prize for the right buyer.

Even if Greencore doesn’t become a takeover target, its growth prospects are much more limited as a UK only business. Although the convenience food sector is growing as more people eat on the go, the near-term economic picture for the wider UK economy is extremely uncertain due to the ongoing Brexit negotiations.

High street retail in the UK has taken a hammering over the last two years as UK shoppers have less disposable income to spend due to inflation, while grocery retail remains incredibly competitive as the battle for market share rages on.

In the end, the US adventure is now over for Greencore. Coveney has said he will stay on as Greencore CEO despite what must feel like a loss for him personally.

Greencore is a company that has proven itself adept at recasting itself over the years, having transformed itself from Irish sugar in the early part of this century into the UK’s leading sandwich company today. The next move by the group will be interesting to watch.