Glenboden M & A Originations

It's time for Britvic to acquire AG Barr

Priority Rating priority rating 2
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Origination Status reports of buyer acquisition strategy, November 2009
Asset AG Barr plc (UK), no.5 domestic soft drinks producer
Buyer Britvic plc (UK), no.2 domestic soft drinks producer
Seller founders and shareholders of AG Barr
Buyer Rationale strengthen no.2 position in CSD market in UK, synergies
Seller Rationale timing, valuation, consolidation pressures going forward
NBs in FY 2009 Britvic reduced its net debt ratio to x2,4
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Britvic is said to be targeting acquisitions again, on the back of strong sales and profit momentum in FY 2009. Carbonated soft drinks are the main growth driver, and are back in vogue in M&A terms. This points to AG Barr as an obvious target, whose scalp would allow Britvic to greatly strengthen its no.2 position, and portfolio offering, in the UK market.

Britvic growing strongly thanks mainly to CSDs ...Britvic outperformed the UK soft drinks market, growing by over 5% to report GBP 980 mln sales revenue in FY 2009 (see chart). Growth was achieved in both CSDs and stills, but the star was the former, which rose by over 10% thanks to core brands Pepsi (under licence), 7UP and Tango. For this reason, and not only, CSDs will surely be prioritised for growth through acquisition.

Looking only at the take-home segment of soft drinks in the UK (which is x3 as big as the on-premises segment), Britvic is already the no.1 player in the stills category, with over 10% share. That category is relatively fragmented, slower growing for Britvic than CSDs, and suffered from higher costs in 2009. For these reasons it's unlikely to be the acquisition priority.

By contrast, Britvic is no.2 in the CSD category in the UK, with nearly 15% share in a market dominated by Coca-Cola (who has over 50% market share). There are good strategic reasons for Britvic to acquire in this category, and Barr is arguably the best candidate.

... buying Barr makes sense in terms of market share ...In market share terms, Barr's 5% would allow Britvic to grow its market share to nearly 20%, thus greatly increasing its lead over the other two significant players, GSK and Red Bull, who both have just under 10% shares.

... as well as portfolio enhancement ...There are compelling reasons also from a portfolio perspective. Barr, with its quirky identity through its iconic 'Irn-Bru' brand, has proven its ability to succeed as 'alternative' vis-a-vis Coke and Pepsi. Beyond that, Barr is developing a balanced and modern portfolio, especially after its acquisitions in 2008 of Rubicon exotic juice drinks, Vitsmart enhanced water and Taut sports drinks.

... and most importantly Barr's strong financial performanceAG Barr's own performance recently, reflected in its H1 2009 figures, has also been very strong. That enhances its attractiveness to Britvic as an acquisition target. On the other hand that will bump up the valuation; but Britvic will prefer to buy a success story than a turnaround case.

Barr's turnover in H1 2009 rose by nearly 30%, to around GBP105 mln. That was mostly down to growth in its flagship Irn-Bru brand; also to the contribution of its 2008 -acquired Rubicon business, which added 20% to the company's turnover.

The company also managed to sustain an EBITDA margin of just under 20%, in that period, consistent with Britvic's own result (see chart).

Barr is also a business with a very low net debt ratio to EBITDA.

Britvic appears to be preparing itself for Barr's acquisition...Then there's the evidence that Britvic is gearing itself up financially for an acquisition of Barr's scale. The group is reported to be looking to raise around GBP 90 mln, via a private share placement in the US, and has apparently hired investment banks to arrange this.

Assuming that Britvic will be looking to pay the same EBITDA multiple for Barr as it did for CCSD in 2007, that of around x10, and taking a view on Barr's FY 2009 forecast, then the enterprise valuation comes to around GBP 350 mln.

To cut a long story short, looking at Britvic's net debt post -acquisition, (net of the cash raised through the equity placement), then the net debt to EBITDA ratio of the combined group would be at the comfortable level of about x3,0

... with overseas options an unlikely alternativeBritvic's International sales, excluding Ireland, rose by nearly 20% in 2009, as the group benefited from growth in its Robinson's squash and Fruit Shoot brands in the Netherlands and Scandinavia.

Indeed, Britvic has European expansion as a strategic target. However, we believe UK consolidation is more financially compelling, and less risky, and so a higher priority in M&A terms.

Historically, Britvic has shown that it can be an acquisitive animal; in mid 2007, it purchased what might be called its 'parallel business' in ireland, CCSD (also no.2 branded CSD player and Pepsico licencee), from C&C Group.

Unfortunately, Britvic noted a 17% turnover decline in that Irish business in 2009. This augments the case for Britvic's next acquisition to be a conservative consolidation play, in the UK, and not overseas.

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THIS LEAD'S VALUATION
Size (€ mln) 385
Sector soft drinks
Asset Quality UK no.5 branded
Seller mid-cap plc
Buyer mid-cap plc
P/S 1,75
P/Ebitda 10,0
Type value estimate
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