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(Sharecast News) - Kingsmill owner Associated British Foods said on Friday that it has agreed to buy Hovis Group from private equity firm Endless for an undisclosed sum.
In its interim results, the company said it had been evaluating a range of strategic options for its UK bakery business, Allied Bakeries, at which profitability has been "increasingly challenged" in recent years by a decline in demand for pre-sliced, packaged bread.
ABF said on Friday that the deal will combine the production and distribution activities of the two businesses, "driving significant costs synergies and efficiencies, to create a profitable UK bread business that is sustainable over the long term".
"The combined business will be better placed to compete effectively and to establish a stable platform for product innovation in the segments of the UK bakery category that are growing as a result of changing consumer tastes and needs," ABF said.
This will include improvement in existing products and expansion into new product ranges.
Chief executive George Weston said: "This transaction will create a UK bakeries business that is both profitable and sustainable over the long term. Supporting the Hovis and Kingsmill brands with well-invested and efficient operations will also enable innovation and growth.
"This solution will create value for shareholders, provide greater choice for consumers and increase efficiencies for customers."
ABF did not disclose any financial details, but Sky News has suggested a price tag of around 75m.
Russ Mould, investment director at AJ Bell, said: "Associated British Foods will hope it can get the best of both businesses as it agrees to buy Hovis from private equity firm Endless and add it to its existing bakery holding Kingsmill.
"These brands have struggled against the market leader Warburton of late and neither is making money right now, the hope is that by combining they will be in a much stronger position.
"The danger is the regulator gets involved. Bread is a staple for most households and there might be some perceived risk that the deal would leave consumers out of pocket.
"Primark-owner ABF's conglomerate structure has come under renewed focus this year. Its discount clothing chain has struggled a touch, as have other parts of the business including its sugar arm.
"The company, and the controlling Weston family, continue to extol the virtues of diversification but for this to be sustainable then all parts of the group need to be in reasonable shape - this deal could help put the Allied Bakeries division in a better place."