By Martinne Geller
LONDON (Reuters) - Shares in Premier Foods (L:PFD) sank as much as 29 percent on Wednesday after U.S. spice maker McCormick Foods (N:MKC) 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 Lawry's seasonings, said that "after careful consideration ... it would not be able to propose a price that would be recommended by the board of Premier Foods while also delivering appropriate returns for McCormick's shareholders.
"Accordingly, McCormick has withdrawn its proposal to acquire Premier Foods," it added in a statement.
It had raised its proposal from 52 pence per share to 60 pence, and then increased it again to 65 pence.
McCormick's withdrawal sent shares in Premier, which had nearly doubled from 31 pence a share when McCormick's interest was revealed on March 23, down 25 percent at 42.8 pence by 1400 GMT on Wednesday.
Premier emphasised its standalone strategy, saying that 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 a deal with Japanese noodle maker Nissin Foods (T:2897), which will help it to expand overseas.
Nissin has raised its Premier stake to 19.9 percent, but its ultimate ambitions remain unknown.
"The challenge now for Premier management is to deliver for its shareholders the sort of value McCormick was offering," said Investec analyst Nicola Mallard.
Two major shareholders, which together control more than 14 percent of Premier, last month criticised its handling of the situation, questioning the board's objectivity and commitment to shareholder value.
SALES TARGET
In rejecting McCormick's advances, Premier raised its medium term annual sales forecast to 2 to 4 percent from 1 to 2 percent, citing the Nissin deal as well as its new plans to sell its cakes in more convenience stores and expand its brands into more premium chilled categories.
The fact that Premier's shares have not retreated all the way down to their pre-offer level suggests the market has some faith in the plans, according to Davy Research analyst Declan Morrissey.
"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, which formed part of Premier's defense strategy, also complicated the situation.
($1=0.7016 pounds)