End of an era as Northern Foods to merge

Called Essenta Foods, the firm will be Dublin-based but listed on the London Stock Exchange.

After struggling to achieve growth amid tough markets, both companies said the merger will offer firepower for growth and greater scale. Analysts called the deal an "exciting development".

"We are putting this together as a combination of best of both, but a genuine merger of equals," said Greencore's chief executive Patrick Coveney, who will lead Essenta.

Shares in both companies soared – Northern by 24.9 per cent to 56.5p and Greencore by 28.9 per cent to 1.34 euros.

Essenta will comprise a 50/50 split between Greencore and Northern shareholders. Northern investors will receive 0.4479 of a new Greencore share for each Northern share they hold.

Northern's finance director Simon Herrick takes the finance role and its chairman Tony Hobson will be non-executive chairman of Essenta. Northern's chief executive Stefan Barden has no place on the new board. Analysts expect him to re-emerge at a retailer.

The companies said they will create 'synergies' or cost cuts of 40m from the deal, with about 15m cut from overheads, 20m from purchasing and supply chain efficiencies and 5m from financing and tax.

Northern currently pays tax at 27 per cent while Dublin-based Greencore pays just 17 per cent.

Lord Haskins, who chaired Northern for 16 years, said it was a "sad end" for the company.

"It (share price) has come down as much as it has over the last seven to eight years," he said.

"They look like two rather small companies leaning against each other."

Northern will lose its Leeds headquarters, but its new management team said it will have a "very significant" operations base in Yorkshire.

It is understood this is likely to be in West Yorkshire, either in Leeds or Wakefield.

Merging allows Greencore to sidestep paying a premium for Northern or taking on more debt.

Lord Haskins added: "There's no such thing as a merger of equals. The business will be based in Dublin – that says who's in charge."

Northern traces its roots back to a milk business in Hull in 1880. Mr Coveney insisted "(heritage) plays a big part in my thinking".

"The new business will remain in the north of England but we will have a small corporate office in Dublin," he said.

But an industry source said: "Heritage disappeared when Northern moved out of Hull. The heritage of the Horsley/Haskins family involvement ended when Chris Haskins departed from the board (in 2002) and they moved to Leeds (in 2005)."

The combined business will employ about 17,000 staff, with roughly 5,000 in Yorkshire. There will be some job losses, but not "huge numbers". Northern recently announced plans to split into two divisions, branded and chilled.

An industry source said this would make it easier to sell on brands, such as Fox's, to concentrate on chilled.

"The branded business is on the block," he said.

However, Mr Herrick insisted Essenta has no plans for asset sales. "We are not looking at our branded businesses and saying these are chips to cash in," he said.

The deal needs shareholders approval and letters of intent have been received from about 30 per cent of Greencore's shareholders and 12 per cent of Northern's. Essenta has negotiated a 450m debt facility.

Essenta was chosen because it is a "neutral" name, added Mr Coveney, with connotations of "essence and quality".

Thumbs-up from the analysts

Analysts at Shore Capital said it makes "eminent sense" and is an "exciting development" for both the industry and the companies.

They said: "It does reflect to some degree the challenges of the trade, not least the possible over demands of the multiple retailers over many years in the prepared foods space."

They added: "We expect little by way of factory rationalisation, not least because ready meal and sandwich capacities are tight at present and growing at high single digit rates, whilst bakery and frozen pizza facilities are distinct to Northern." They upgraded their recommendation to buy.