Glenboden M & A Originations

AG Barr raises its profile as an M&A participant in soft drinks

Priority Rating priority rating 4
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Origination Status announcement of 2008 results, March 2009
Asset A.G. Barr plc (UK), leading domestic independent soft drinks producer
Buyer candidates include Pepsico, Kofola (merger)
Seller founders and shareholders of AG Barr
Buyer Rationale growth through independent CSD brands, scale, new geographies, synergy
Seller Rationale attractive valuation, timing, European expansion
NBs valuation based on Britvic acquisition of CCSD in Ireland, May 2007
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Soft drinks, especially carbonated ones, have been an unfashionable M&A category in recent years. That’s allowed a mid-sized player, like AG Barr, to remain independent. That company’s performance in 2008 shows that alternative, quirky CSD concepts can still succeed (‘Irn-Bru’ brand), and that a balanced, modern portfolio can de developed alongside them. Maybe there’s some juice left in soft drinks M&A, after all ? We look at two scenarios for AG Barr, in the UK and central Europe.

Barr is a legacy independent soft drinks player in the UKAG Barr was founded in the late 19th Century, and is still controlled by the Barr family, although it’s now a public company. Its flagship product is Irn-Bru, a legacy CSD brand with a Scottish heritage that’s become nationwide now in the UK.

Recent success with its core CSD proposition …During a very successful 2008, Irn-Bru claims to have been the fastest growing flavoured CSD in the UK, with 8% value growth. That trend has continued into 2009, with the brand overtaking Fanta to become a leading ‘alternative’ flavoured CSD in the UK. This was achieved through innovations, and a record marketing budget highlighting the independent character of the Irn-Bru brand.

…. combined with developing a broader portfolio ….Barr’s strategy also includes modernising and balancing its portfolio, placing emphasis on health & wellness, functional and adult drinks. It took big steps in that direction in 2008, through acquiring Rubicon exotic juice drinks, Vitsmart enhanced water and Taut sports drinks. It also revitalized and relaunched its legacy Tizer CSD brand, as well as its Strathmore Spring water offering.

…. to achieve both growth and profitability in 2008Overall, Barr’s turnover grew by 14% in 2008, to reach 170 mln GBP, of which 7% was organic growth. Its sales growth in the CSD and juice categories was above that of the markets, so share is up also. At the same time, the company’s EBITDA margin was 18%, which is quite high for a mid-sized player that’s making a big marketing push.

Barr could be of interest to the two global majors now …For all of these reasons, we believe that Barr could make a surprise entry into the M&A radar screens of the two global soft drinks majors, Coca-Cola and (moreover) Pepsico. Timing is enhanced by the fact that, after a major capex plan that included nearly 40 mln GBP in the company’s main factory in Cumbernauld, Barr has no big restructuring or capex commitments into 2009. The majors always prefer to buy companies that have just completed an investment cycle.

…. or be a participant in a pan –Europe soft drinks merger with e.g. Kofola ….An alternative scenario, if Pepsico is emphatic about not buying CSD –heavy companies in developed markets, whatever their attractions, is for Barr to seek non-organic growth in continental Europe. One option is a major regional player that’s emerged in central Europe, called Kofola.

Kofola SA was formed by the merger in 2008 of Kofola, the leading independent soft drinks player in Czech and Slovakia, and Hoop, the equivalent company in Poland. With combined revenues of € 320 mln, the group’s strategy is to be a top three player in its core markets, Poland, Czech, Slovakia and maybe Hungary, by 2010. It also derives about € 50 mln in sales in Russia, through its Megapack joint-venture. The group plans further acquisitions in its region.

…. whose private equity shareholders might be concerned with existing risks …Over 40% of the shares in Kofola are held by central Europe’s largest private equity firm, Enterprise Investors. They will be acutely aware of the risks involved in integrating Kofola with Hoop, with an eye on the mixed success of other Czech –Polish business combinations, notably the Żabka retail chain and (as veterans will remember) PHS in the 1990s. At the same time, AG Barr has shown interest in expanding into the markets of central Europe.

…. and see big upsides in a combination with AG BarrA merger of Barr with Kofola would bring the former’s strategic marketing skills to bear on Kofola’s ambitious growth targets. This could be a vital factor, given Barr’s successful track record in doing things differently to Coke and Pepsi. In addition, Barr would enhance Kofola’s restructuring expertise, as well as contributing a net debt to EBITDA ratio of only x1,0 to the combined balance sheet.

In theory Barr might be the majority partner in any merger. Although it’s 20% smaller than Kofola in sales terms, its operating profit was almost twice as high in 2008.

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THIS LEAD'S VALUATION
Size (€ mln) 370
Sector soft drinks
Asset Quality UK branded
Seller mid-cap plc
Buyer large plc
P/S 1,8
P/Ebitda 10,0
Type value estimate
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