Introduction to the Merger Talks

The owners of Hovis and Kingsmill, two leading bread producers in the UK, are in discussions about a potential merger. This comes amidst a decades-long decline in supermarket bread sales. Associated British Foods (ABF), the parent company of Allied Bakeries, which owns Kingsmill, and Endless, the investment company that owns Hovis, have been in talks about a possible combination of the two companies.

Background of the Companies

Hovis was founded in 1890 by Herbert Grime, who paid 25 pounds for the rights to the name, derived from the Latin "Hominis Vis," meaning the strength of man. Allied Bakeries, on the other hand, was founded in 1935 by Willard Garfield Weston. The company has been facing challenges in recent years due to inflation, competition from specialist bread producers, and changing consumer habits towards lower carbohydrate diets.

Market Challenges

The entire UK bakery market is worth around 5 billion GBP annually, with 11 million loaves sold daily. However, the industry has been affected by the war in Ukraine, which has led to increased wheat and flour prices. This has put pressure on bread producers, including Hovis and Kingsmill. The main obstacle to a potential merger would be its impact on competition in the UK market.

Market Share

Warburton, a family-owned company, is the largest bakery group in the UK, with an estimated 34% market share of the branded sliced bread sector. Hovis has a 24% market share, while Kingsmill has 17%. A merger between Hovis and Kingsmill would give the combined group a larger market share, but would still be smaller than Warburton’s overall turnover due to the width of its product range.

Potential Merger

A merger between Hovis and Kingsmill would be a significant development in the UK bread market. The combined group could benefit from cost savings of up to 50 million GBP. However, the reduction in the number of major supermarket bread suppliers from three to two would be a test for the Competition and Markets Authority (CMA). The CMA has been under scrutiny in recent months, with the government removing its chairman, Marcus Bokkerink, in an effort to make the regulatory body more growth-oriented.

Alternative Options

An alternative to a merger could be a joint venture between Hovis and Kingsmill, combining their sales networks. However, this is seen as a less likely option. ABF has stated that it is evaluating strategic options for Allied Bakeries and expects to provide an update in the second half of 2025.

Financial Performance

ABF has described the losses at Allied Bakeries as unsustainable, but has not released any details about the company’s financial performance. Hovis, which was acquired by Endless in 2020, employed around 2,700 people and operated eight bakeries and its own mill at the time of the takeover. The current CEO of Hovis, Jon Jenkins, is a former boss of Allied Milling and Baking. Neither ABF nor Endless has commented on the potential merger talks.