Glenboden M & A Originations

Bigger owners needed for C&C’s attractive cider and whiskey assets

Priority Rating priority rating 4
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Origination Status management announcement of Q3 results, January 2009
Asset C&C Group plc (Ireland) leading cider producer in Ireland and UK, whiskey exporter
Buyer candidates include Bacardi, Campari, LVMH (for whiskey business)
Seller public shareholders of C&C
Buyer Rationale addition of high -growth Irish whiskey brand to global portfolio
Seller Rationale insufficient scale to convert brand equity into improved market performance
NBs C&C’s net debt to remain just under x2,0 EBITDA in FY 2009
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In late 2008, Glenboden suggested that C&C was ripe for a takeover, and the split up of its cider and spirits businesses. After Q3 2008 saw a further decline in revenues, in particular in the group’s cider activity, we believe this scenario is getting closer. The shine has not yet come off spirits brands’ valuations, and so significant interest in Tullamore Dew whiskey could emerge from a number of global majors; the key for C&C’s management is not to delay this divestment into a recessionary 2009.

C&C’s revenues are in quite steep decline, but at the same time its businesses enjoy high operating margins and marketing support. Thus management’s contention that the group’s brand equity value is high, but that this hasn’t been ‘converted into improved market performance’.

We believe that the fundamental problem is that C&C lacks the sales and distribution to capitalize on its brands, especially after the sale of its soft drinks business CCSD, no.2 in the Irish market, to Britvic in 2007.

Management effectively admits this in the reasons cited for the sales decline - strong competition and an ‘increased off-trade profile’ in the cider market, where C&C is relatively weak; and ‘route to market problems’ preventing tests of its Magners cider brand in Spain and Germany from being successful, in spite of a strong consumer response.

C&C’s valuable brand assets could be more successfully managed by groups with stronger sales and distribution clout. EBITDA margins on its cider and spirits businesses, in H1 2009, were respectively about 30% and 25%, with only a slight decline in Q3 in spite of a fall in cider sales of 19%, and flat sales of spirits in that quarter year-on-year. These premium –segment margins are achieved in spite of, or maybe thanks to, marketing spend of around 20% of sales value in both cider and spirits.

But time is not on C&C’s side, if it decides that sale to bigger players is the route to maximizing value.

The group’s two big ciders brands, Bulmers in Ireland and Magners in the UK, which together constitute nearly 80% of total revenue, are not only in decline in sales terms but also in market share. What’s more, management’s forecast for FY 2009 is even grimmer than Q3 performance.

The most likely acquirer of these brands, in our view, is a brewer that’s looking to diversify its UK portfolio by adding market –leading cider brands, without reducing its margins or sales cost –coverage. Carlsberg falls clearly into that space, after its acquisition of Scottish & Newcastle in 2007. That group is keen to develop its non –beer business, and C&C’s cider brands also have potential across Europe.

On the whiskey side, C&C’s flagship brand, Tullamore Dew, grew by over 20% in volume terms in FY 2008, but has seen that increase slow to just over 10% in both H1 and Q3 2009. Well positioned as an authentic Irish whiskey, it’s sold in 80 markets internationally, and is expected to deliver up to €80 mln in turnover in FY 2009.

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, Campari and possibly LVMH.

Unlike many companies across the food and beverages world at this time, C&C is not under financial pressure (leaving aside pension deficits). Combining management’s operating profit forecast for FY 2009, at € 90 mln, with an estimated D&A of € 20 mln for the year, and assuming that the Q3 net debt figure of € 215 mln is unchanged, the group’s net debt ratio may remain just below 2,0 which is low by alcohol beverage standards.

On the other hand, management must think ahead, and protect the value of its assets from further impairment, because the downside risk going into 2009 is high. Expect some key developments between now and the announcement of FY 2009 results in March.

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THIS LEAD'S VALUATION
Size (€ mln) 700
Sector cider
Asset Quality UK. leader branded
Seller mid-cap plc
Buyer large plc
P/S 1,2
P/Ebitda 6,5
Type value estimate
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