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P&H collapse disrupts UK tobacco supply

The wholesaler has moved into administration, spelling trouble for retailers, and especially tobacco companies
P&H collapse disrupts UK tobacco supply

Behind every well-stocked retailer is a reliable wholesaler. Or not, as the case may be. Wholesale group Palmer & Harvey has officially moved into administration, confirming 2,500 job losses, despite months of negotiations to save the 90-year-old company. The group supplies 90,000 supermarkets and convenience stores across Britain, making it a viable competitor to the likes of Booker (BOK), which is soon to be taken over by grocer Tesco (TSCO). However, hopes that it would be bought, either by private equity or supported by one of its larger customers have vanished. P&H had previously voiced concerns over the tie-up between Britain’s largest supermarket and Booker on the basis that it might lose it as a customer once the merged entity was finalised. It also warned that the enlarged group would automatically hand Booker access to cheaper supply deals over competitors. 

Although P&H says it will wind operations down as smoothly as possible, the collapse could be bad news for other London-listed groups. Around half of McColl’s (MCLS) convenience chain stores are supplied by P&H, which translates into roughly a quarter of sales. But analysts at Peel Hunt are urging calm: it believes McColl’s stores are well-stocked at present, and expects wholesale group Nisa – which supplies the other half of the business – to come to the rescue. Nisa’s supply agreement with McColl’s was due to end now that the latter had agreed a new arrangement with supermarket Morrisons (MRW), but analysts think relations are still good enough for Nisa to welcome what they call “farewell business”. Equally, it’s thought Morrisons could step up to the plate early and start supplying McColl’s stores ahead of schedule.

Shares in McColl’s remained flat on the news, but Imperial Brands (IMB) – whose cigarettes are distributed to retailers by P&H – said they were disappointed at its demise after working to help save the company for several months. The market was equally disappointed, and sent the shares there down 3 per cent by way of response. At present, the tobacco group estimates that the P&H insolvency will make a one-off £160m dent in group operating profits during the current financial year, most of which would relate to non-recoverable excise duty.

But Imperial wasn't the only tobacco group involved in efforts to save P&H – which is hardly surprising given the wholesaler’s position as the UK’s largest supplier of cigarettes. Japan Tobacco International (TYO:JTI) also had an existing relationship with the company, and was one of the first to confirm the bankruptcy. It said it had tried to extend financial and operational support to P&H to help prevent its collapse, and this included working with private equity group Carlyle and Imperial Brands to agree to roll over combined loans of £60m and provide additional funding to keep the business solvent.

But as negotiations progressed, it became clear that P&H would require an additional, significant cash injection to plug a hole in working capital. What’s more, administrators at PwC said November wages had been processed, but could only be paid thanks to the support of the group’s secured creditors. Convenience chain Costcutter was forced to establish a new supply deal with a rival wholesaler after being informed that its contract with P&H would be terminated with immediate effect.