AG Barr raises its profile as an M&A participant in soft drinks
- April 03, 2009
||announcement of 2008 results, March 2009
||A.G. Barr plc (UK), leading domestic independent soft drinks producer
||candidates include Pepsico, Kofola (merger)
||founders and shareholders of AG Barr
||growth through independent CSD brands, scale, new geographies, synergy
||attractive valuation, timing, European expansion
||valuation based on Britvic acquisition of CCSD in Ireland, May 2007
Soft drinks, especially carbonated ones, have been an unfashionable M&A category in recent years. Thatâs allowed a mid-sized player, like AG Barr, to remain independent. That companyâs performance in 2008 shows that alternative, quirky CSD concepts can still succeed (âIrn-Bruâ brand), and that a balanced, modern portfolio can de developed alongside them. Maybe thereâs some juice left in soft drinks M&A, after all ? We look at two scenarios for AG Barr, in the UK and central Europe.
AG Barr was founded in the late 19th Century, and is still controlled by the Barr family, although itâs now a public company. Its flagship product is Irn-Bru, a legacy CSD brand with a Scottish heritage thatâs become nationwide now in the UK.
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 âalternativeâ flavoured CSD in the UK. This was achieved through innovations, and a record marketing budget highlighting the independent character of the Irn-Bru brand.
Barrâs 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.
Overall, Barrâs 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 companyâs EBITDA margin was 18%, which is quite high for a mid-sized player thatâs making a big marketing push.
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 companyâs 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.
An alternative scenario, if Pepsico is emphatic about not buying CSD âheavy 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 thatâs 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 âŹ 320 mln, the groupâs strategy is to be a top three player in its core markets, Poland, Czech, Slovakia and maybe Hungary, by 2010. It also derives about âŹ 50 mln in sales in Russia, through its Megapack joint-venture. The group plans further acquisitions in its region.
Over 40% of the shares in Kofola are held by central Europeâs 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 âPolish business combinations, notably the Ĺťabka 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.
A merger of Barr with Kofola would bring the formerâs strategic marketing skills to bear on Kofolaâs ambitious growth targets. This could be a vital factor, given Barrâs successful track record in doing things differently to Coke and Pepsi. In addition, Barr would enhance Kofolaâs 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 itâs 20% smaller than Kofola in sales terms, its operating profit was almost twice as high in 2008.