Glenboden M & A Originations

Ramifications of Coca-Cola’s investment in Innocent drinks

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Origination Status joint announcement of investment agreement, April 2009
Asset Innocent Ltd (UK), no.1 domestic branded smoothies producer
Buyer The Coca-Cola Company (USA), world’s largest soft drinks company
Seller three founders of Innocent
Buyer Rationale experiment with a leading new frontier drinks company, full acquisition potential
Seller Rationale decline in sales, European expansion, capital injection
NBs Innocent has est. 65% market share in smoothies in UK
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Many say that Innocent has sold its soul by teaming up with the multinational purveyor of unhealthy CSDs that’s Coca-Cola. However, insiders know that this deal was highly predictable, given Coke’s recent acquisitions strategy and Innocent’s development trajectory. We look at the broader M&A context of this transaction, identify other contenders for European leadership in the fledgling smoothies market, and predict what will happen to Innocent.

A start-up that created the branded smoothie category ….Innocent was established in 1999 by three young Cambridge graduates. It pioneered the healthy, 100% crushed fruit market in the UK, also known as ‘smoothies’. (Detractors say however that there’s nothing especially healthy about smoothies, which essentially are made from pasteurized frozen fruit).

…. Innocent needs funds for expansion after a tough 2008Innocent appears to remain clear leader, with 60 – 70% share of the UK’s 170 mln GBP smoothies market. Its development has been somewhat of a roller-coaster, however, with double-digit annual growth up until 2007, followed by a 20% value decline in 2008 caused by price cuts and the recession –hit consumer trading down to less premium offerings.

This decline in 2008 is likely to have triggered Innocent’s search for a strategic investor, to strengthen the capital base of the company and to provide funds for expansion in Europe, where it now has offices in at least eight countries.

Coke’s portfolio strategy fits well with Innocent …Coca-Cola’s acquisitions strategy recently has focused on taking the group beyond CSDs and into healthier soft drinks categories. This has included risky investments in small, young concepts, such as the acquisition of Fuze Beverage in the US in 2007, and the attempted purchase of Bionade in Germany in the same year. The group appears to be allowing such entities to remain relatively independent from its mainstream portfolio, to prevent them getting smothered in its huge system.

For all these reasons, it’s no surprise that Coke won the tender to invest in Innocent, in spite of the apparent mismatch between craft-like smoothies and big-business cola. On the positive side, Innocent will now be in a strong position to build and define the smoothies market in Europe, which is still very small, and will have the means to refine and expand its portfolio. On the other hand, it will need to invest a lot, beat stiff competition and lose its ‘innocence’.

… but success in Europe will require major investment …In continental Europe, the smoothies markets are much smaller than in the UK, with the exception perhaps of Scandinavia, Benelux and Switzerland. The opportunity for Innocent is therefore huge, but a lot will need to be spent on educating the consumer, especially young people who are the main buyers in this category. The company will also need to invest in production capacity, or at least secure outsourcing contracts, in its key geographies.

In that last area, one option for Innocent is to team up with Refresco. That group has 18 production facilities across Europe, and is hungry for new contracts in order to better utilize that capacity. A premium product like smoothies might also help Refresco to improve its margins, which are quite low owing to its hitherto focus on private label soft drinks. Such an alliance could enable Innocent to grew quickly, which will be important in the face of competitive threats.

… and competition will get tougher …These threats will come from companies like Schwartau, with its smoothie and other chilled fruit portfolio marketed under the Hero brand. Eckes-Granini, also from Germany, is another strong contender, with its strong presence in premium segments throughout Europe. Then there’s the Jamaica Producers Group, owner of Sunjuice in the UK, which is poised for expansion in fresh juices across Europe after acquiring Hoogesteger in Holland in 2008.

…. including the threat of private labelPerhaps the biggest threat to Innocent, however, will come from private label. Smoothies, especially those marketed as 100% pure fruit, are relatively easy to manufacture and the entry barrier is low. This makes it easy for private label to compete with branded smoothies on price alone. The UK market has already seen a big expansion of the private label segment in the big chains, recently.

New differentiated products will be key for Innocent …For this reason we think that Innocent will need to focus, and spend Coca-Cola’s money, on new product development, in parallel or even before European expansion. This will differentiate the brand, by introducing functionality of one kind or another. It might also allow Innocent to use supported health claims, at last, after the Advertising Standards Agency dismissed at least one of its antioxidant claims, back in 2007.

… to avoid failures met by other smoothies brandsIf new, more sophisticated products take Innocent away from its pure and, well, innocent positioning, then so be it. The alternative might be for Coke to see its investment go the same way as Pepsico’s 20 mln GBP acquisition of PJ Smoothies, also in the UK, in 2005. By the end of 2008 Pepsico had ‘retired’ that brand, after a decline in its market share and marketing failures.

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THIS LEAD'S VALUATION
Size (€ mln) 35
Sector soft drinks
Asset Quality UK no.1 niche
Seller founders
Buyer large plc
P/S 1,5
P/Ebitda n/a
Type value estimate
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