Glenboden M & A Originations

Ireland's C&C looking vulnerable but has attractive cider and whiskey assets

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Origination Status seller announcement of business unit divestment, September 2008
Asset FindlaterGrants (Ireland), leading domestic wine distributor
Buyer DCC plc (Ireland), international distributor in energy, healthcare and foods
Seller C&C Group plc, (Ireland) leading cider producer in Ireland and UK, whiskey producer and exporter
Buyer Rationale expansion of domestic footprint in alcohol beverage distribution
Seller Rationale part of recovery programme, focus on turnaround of core businesses
NBs C&C divested its domestic soft drinks business, to Britvic, in May 2007
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Last year, C&C sold its soft drinks business to Britvic, re-organised its operations and cut costs, and continued to invest in marketing and capex behind its three big cider and spirits brands. In spite of that, the group’s revenues have continued to decline, and operating profit has been flat. C&C’s only strategy is to continue to stabilize its situation through 2008 /9. So, we think the group is ripe for a takeover, and the split up of its cider and spirits businesses. The most likely acquirer for the former is a brewer with a UK focus; for the latter, a number of global spirits players might be interested in C&C’s fast –growing Tullamore Dew Irish whiskey brand.

In terms of brands, C&C has the market leader in cider in both the Irish off-trade (Bulmer’s, with about 10% value share), and in the UK on-trade, where Magners has an impressive 60% share of the premium segment. Although cider sales declined by 10% in 2007 and again in H1 2008, these brands are high –margin, and could strengthen the portfolio and boost the cost coverage of any major brewer in the UK.

A obvious buyer is Carlsberg, after its acquisition of Scottish & Newcastle last year. Carlsberg is keen to develop its non –beer business, and these cider brands also have the potential to be marketed across Europe; Magners is already being trialed by C&C in Spain and Germany.

On the whiskey side, C&C’s flagship brand, Tullamore Dew, grew by 22% in volume terms in 2007, and continued to grow in H1 2008. Well positioned as an authentic Irish whiskey, it is sold in 80 markets internationally, delivered over €60 mln in turnover in 2007, and is backed by marketing spend equivalent to 25% of sales value (which is high).

Although Irish whiskey is only niche in comparison with Scotch, Tullamore Dew has a lot of potential if slotted into the portfolio of a global spirits producer. The obvious tips, propagated as active acquirors by Glenboden recently, are Bacardi and Campari.

C&C’s financials make the case for a takeover quite compelling. In 2007, sales revenue fell by 8%, to € 680 mln, with operating profit tumbling dramatically by 37%, to reach € 125 mln. In H1 2008, top –line performance fell by a further 8%, and operating profit only rose by 1,5%; that’s in spite of the completion of a group re-organisation and cost reduction plan, delivering € 10 mln p.a. in savings, at the end of 2007.

C&C blames economic conditions and two poor summers, but we think it has a more fundamental problem of scale (or rather lack thereof).

C&C’s key assets and balance sheet are attractive. The group has invested heavily in marketing, increasing spend by 40% in 2007 in the case of cider, to protect the value of its brands; in spite of that, the group’s overall EBITDA margin remained very respectable, at 22% of sales.

These factors, in tandem, make C&C’s brands all the more attractive to potential acquirors. Another positive feature is low indebtedness. Last year, C&C raised € 250 mln by selling its soft drinks business CCSD, no.2 in the Irish market and including the no.1 bottled water brand Ballygowan, to Britvic. This transaction helped to reduce the group’s net debt to only 1,7x EBITDA. That’s very enticing for any buyer, especially one that’s highly leveraged.

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