Glenboden M & A Originations

Orangina deal's swallow does not make a spring

Priority Rating priority rating 3
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Origination Status reports of binding offer submitted, September 2009
Asset Orangina Schweppes (France), no.3 branded soft drinks producer in Europe
Buyer Suntory Ltd (Japan), domestic diversified food and beverages producer
Seller Blackstone (USA) and Lion Capital (UK), private equity firms
Buyer Rationale global expansion in soft drinks, diversification from beer, cash absorption
Seller Rationale attractive valuation, timing, availability of buyers
NBs Suntory is itself the subject of a takeover bid from domestic rival Kirin
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Back in early 2007, Glenboden suggested that private -equity owned Orangina had 'teed itself up' nicely as a divestment candidate, after its significant purchase of Rosinka in Ukraine. Two years later, we pointed to the irony that, while the rest of the corporate world had pulled in its acquisition horns, the big three Japanese drinks groups were out on a spending spree. The proposed acquisition of Orangina by Suntory confirms these two observations; but it doesn't mean that the global M&A market is becoming more active again in general.

Rosinka deal raised Orangina's profile ...Orangina acquired Rosinka in Ukraine in 2007, a brand with a strong presence in the Kiev market; the plan being to take it nationwide, and use as a distribution platform for Orangina's international brands, in the high -potential and 50 mln population Ukrainian market.

... but the reported price for the group is too highHaving said that, the reported price that Suntory will pay for Orangina, € 2,6 bln, is in our view too high. Maybe they really mean US$ 2,6 bln, or just under € 2 bln, which is the price Blackstone and Lion Capital paid Cadbury for the business in 2006 ? That would be more appropriate, and provide a good equity return anyway to those firms, given how highly leveraged that deal was.

For a start, privately -held Suntory's famous warchest has been seriously depleted after its purchase of Frucor, New Zealand's market leader in soft drinks, for NZ$ 1,2 bln a year ago. The Orangina deal, especially at such a high price, would test the amount of leverage headroom that Suntory has.

Secondly, and even if it's no.3 in Europe in volume terms, and apparently no.2 in the still soft drinks segment, most of Orangina's sales are concentrated in a few countries, like France, Spain, Italy and now Ukraine. So the group's credentials are quite weak as a 'pan -European' business.

Then there's the comparative transaction angle ...The € 2,6 bln price tag for Orangina would translate into a P/S of 2,6 and an est. P /EBITDA of about 12. Although those are roughly the multiples paid by Suntory for Frucor, there are key differences that make Frucor better value.

Suntory's strategic focus is on Asia and Oceania, putting New Zealand's Frucor squarely on its radar screen. Should Suntory value a business in far -away Europe with the same keenness as it did Frucor?

... and lack of stategic priority for Suntory in Europe ...Remember that the group's European acquisitions have so far, this cycle, been limited to Bowmore Islay malt whisky distillery in Scotland, and Chateau Legrange wine in Bordeaux, France. Both were quite small and arguably just 'trophy' deals.

... and limited profit headroom and tired brands at OranginaAlso, Orangina's EBITDA margin is already high, at over 20%, thanks to streamlining efforts by its private equity owners, that included the offloading of spare capacity in France, at Nuits Saint Georges, to Refresco in 2007. There's a limit therefore to how much value Suntory can add to that, not to mention an absence of synergies.

Plus Orangina's brands are looking quite tired and underinvested. Orangina itself peaked as a brand some time in the 1980s, and has recently been de-premiumised by turning from glass to a PET 'bubble' bottle. Apparently the group's sales have grown since acquisition by private equity in 2006, but it's likely that much of that comes from private label.

The deal may be overly -driven by bidder competition ...If Suntory is paying such a high price, then it's likely to be because (i) its strategy of growth through overseas acquisitions has overcome its valuation prudence; and (ii) it's probably had Asahi breathing down its neck as a competing bidder.

Asahi, although also focusing its M&A strategy on Asia and Oceania, acquired Schweppes Australia in early 2009; so it's likely to have an appetite for more soft drinks deals, especially those including the Schweppes brand, even if they're in far -flung Europe.

Besides which, Asahi is keen to step up its acquisition momentum. With 40% of the Japanese beer market, market leader, it's at least as rich as Suntory. Plus its deal -making has been too slow so far, to meet its target of a four-fold increase in overseas sales; its only other significant purchase this cycle, other than Schweppes Australia, has been a minority stake in China's Tsingtao brewery.

... hinting that Schweppes Americas will be the next Japanese targetHow times have changed. Less than two years ago, Cadbury ended up demerging its Schweppes Americas business, because it couldn't find a satisfactory purchase offer. Maybe Dr Pepper Snapple will be the next target for Asahi or Suntory ?

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THIS LEAD'S VALUATION
Size (€ mln) 2.000
Sector soft drinks
Asset Quality Europe no.3 branded
Seller private equity
Buyer private corporate
P/S 2,0
P/Ebitda 9,0
Type value estimate
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