Recent hostilities between Greencore Group and Bakkavor Group indicate a return to familiar shopping habits on Britain’s high streets, as Sainsbury’s reports a resurgence in weekly shopping as remote work fades.

Greencore, the largest producer of convenience foods and food-to-go items in the UK, has been eyeing its competitor Bakkavor Group. On Friday, Bakkavor’s founders and significant shareholders, the Icelandic Gudmundsson brothers, dismissed a second tentative offer valued at £1.1 billion in cash and shares. As per Takeover Panel regulations, Greencore must present a formal offer by April 11.

The potential merger would create a leading supplier in the food-to-go sector, boasting approximate annual revenues of £4 billion. Both companies primarily distribute through well-known retailers, including Tesco, M&S, Costa Coffee, and Shell or BP petrol stations. Such a union would provide enhanced pricing leverage against some of the industry’s toughest corporate clients. Given the UK market’s fragmentation, valued at £24 billion annually, monopoly concerns are minimal.

Management at Greggs, the bakery chain, acknowledged recently that producers have been facing increasingly challenging market conditions without overall volume growth. A significant factor contributing to this situation is the enduring post-COVID trend of continued remote work, particularly impacting city-center pubs and restaurants, which tend to be busier on Thursdays than Fridays—though this is starting to change.

Additionally, there are 11 million individuals who are not working—either from home or other venues—of whom 9.5 million are categorized as economically inactive, making them less likely to purchase commercially prepared meals. Chancellor Rachel Reeves has vowed to address these issues, but changes may take time.

Such factors have slowed the rapid growth of Greencore shares, which increased from 69.5p to 217p over the year leading to October. The possibility of issuing new shares to facilitate a takeover of Bakkavor has pressured the stock price, although it remains above the 169p level seen in January. Investors now ponder the future direction.

On a positive note, there is potential for a rebound in UK fast-food sales following the pandemic, supported by Greencore’s restoration of its dividend last year. The ‘food-to-go’ sector is believed to be operating at about 85% of pre-COVID levels, with industry sources suggesting a full recovery could take another couple of years.

The challenges facing Greencore became evident in December, when yearly results indicated a 3.4% increase in like-for-like sales—split between 1.6% from volume growth and 1.8% due to price increases. Despite this, total revenue fell by £106 million to £1.8 billion, primarily due to the shedding of underperforming contracts. Gross margins improved from 29.7% to 33.2%, even before retailers took their share of prices. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) climbed from £132.8 million to £153.7 million, with an enterprise value equating to 7 times EBITDA.

During a capital markets event last month, Greencore showcased new partnerships with clients like Asda and highlighted opportunities stemming from other retailers closing cafés and in-store dining services in favor of Greencore’s offerings.

Deutsche Bank analysts expressed optimism regarding Greencore’s focus on returns, setting a medium-term target exceeding 15%, up from 11.5% in the previous year. This growth target hinges on 3-5% revenue expansion and a 7% adjusted operating profit margin, though persistent inflation might pose challenges.

Analysts at Peel Hunt predict modest single-digit growth, at the lower end of management’s projections, alongside further enhancement of margins. Their forecast of 13.6p for earnings per share and 2.2p dividends this year places the shares at a prospective multiple of 14.2 times earnings with a yield of 1.14%, anticipated to adjust to 12.1 and 1.3% by the year ending September 2027.

These valuations help explain the stagnant share price experienced over winter amid a murky economic outlook this year. Should the Bakkavor acquisition materialize, Greencore shares could benefit in the long run. Advice: Hold – The firm may be at a pivotal crossroads.

Glencore

Stock markets can be unpredictable, and London’s reaction to favorable results from commodity trader Glencore has been no exception, particularly in light of management’s consideration to relocate the company’s share listing to a potentially more favorable environment. This move, seemingly beneficial for share valuation, instead saw the stock decline to an 18-month low before slightly rebounding.

This trend may affirm CEO Gary Nagle’s decisions, although it presents an odd opportunity. The relocation may not take hold until well into the next year, providing ample time for profitable developments before any decision is finalized. Additionally, a potential listing in New York could offer a more stable currency zone and a positive market environment for long-term share value.

Conversely, a concern remains regarding coal—a significant part of the commodity portfolio—in today’s net-zero climate. Furthermore, any peace agreement relating to Ukraine could likely boost supply, subsequently lowering prices. Bank of America comments, “We see no signs of price recovery in the near term.”

Nagle is also implementing cost-cutting measures at Glencore’s copper and zinc facilities in Canada due to declining processing margins, consolidating Quebec copper operations and certain US recycling sites under the zinc smelting division to boost efficiency.

Jefferies predicts that shares could drop below 10 times annual earnings in the coming years, supported by a 2.4% dividend yield.

The dynamic at Glencore remains centered around the management’s inclination for acquisitions, which has historically both hindered and propelled progress. This trend appears set to continue into the foreseeable future, making the shares primarily a wager on Nagle’s ambitious deal-making pursuits. Advice: Buy – A calculated bet on future gains.