By Martinne Geller
LONDON (Reuters) - Shares in Premier Foods (PFD.L) sank 27 percent on Wednesday after U.S. spice maker McCormick Foods (MKC.N) dropped its 1.5 billion pound ($2.1 billion) takeover proposal for the UK maker of brands including Mr Kipling cakes.
McCormick, known for its own name spices and those under the Lawry's and Schwartz brands, said it would be unable to make a proposal that would both be recommended by Premier Foods' board and deliver sufficient returns for its own shareholders.
"Accordingly, McCormick has withdrawn its proposal to acquire Premier Foods," it said in a statement.
The move sent shares in Premier, which had nearly doubled from 31.50 pence a share when McCormick's interest was revealed last month, as low as 39.25 pence. They closed down 27 percent at 41.75 pence.
Premier's second-largest shareholder, hedge fund Paulson & Co, criticised the food company's board for rejecting McCormick's proposal to buy the shares at 65 pence each, up from an initial proposal of 52 pence and a second of 60 pence.
"Extremely disappointing that the board could not recommend an offer at a 106 percent premium to the pre-announcement price," a spokesman for the fund told Reuters.
Paulson and another top 5 shareholder, Standard Life Investments (SL.L), slammed Premier's board last month for its outright rejection of McCormick's earlier advances.
They also criticised a separate deal Premier struck with Japanese noodle maker Nissin Foods (2897.T), which allowed private equity firm Warburg Pincus to cash out of the UK company at a premium not offered to anyone else.
McCormick is now barred from making another approach to Premier for six months under UK takeover rules, but Premier can seek to resume talks if it wants.
"I don't think this is dead yet," said an industry banker not involved in the situation. "If I were a gambler, I'd think the shareholders would have some pretty tough discussions with Premier Foods management."
Premier emphasised its standalone strategy, saying it "sees a strong future for an independent Premier Foods, and believes that the foundations have been laid for significant growth and shareholder value creation".
It repeated that its longer-term prospects will be enhanced by the Nissin deal, which will help it to expand overseas.
Nissin has raised its Premier stake to 19.9 percent, but its ultimate ambitions remain unknown. It has very little geographic or product overlap with Premier, which would limit cost savings in any outright acquisition.
"The challenge now for Premier management is to deliver for its shareholders the sort of value McCormick was offering," said Investec analyst Nicola Mallard.
HIGHER SALES TARGET
In rejecting McCormick's advances, Premier raised its medium-term annual sales target to 2 to 4 percent from 1 to 2 percent, citing the Nissin deal as well as new plans to sell its cakes in more convenience stores and expand its brands into more premium chilled categories.
The fact Premier's shares have not retreated all the way down to their pre-offer level suggests the market has some faith in those plans, Davy Research analyst Declan Morrissey said.
"The share price today is telling you that people think the more realistic growth targets are achievable and people buy into that, and that the share price isn't going to go back to where it was before," Morrissey said.
Premier has a stable of very well-known and profitable brands, but it has been handicapped by big debt and pension obligations following an earlier acquisition spree.
McCormick's latest proposal of 65 pence valued Premier's equity at 537 million pounds.
Sources close to the situation told Reuters the main sticking point that led to the collapse of negotiations was price, though the alliance with Nissin also complicated the situation.
(Editing by Keith Weir and David Clarke)