Glenboden M & A Originations

What chance Innocent avoids being crushed by Coca-Cola ?

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Origination Status proprietory origination, January 2010
Asset independent expansion platform in continental Europe
Buyer Innocent Ltd (UK), no.1 domestic branded smoothies producer
Seller Refresco Holding BV (Holland), no.1 producer of private label soft beverages in Europe
Buyer Rationale production capacity and route to market (as brand owner)
Seller Rationale evolution from private label to more premium offerings (as outsourcing partner)
NBs Coca-Cola acquired just under 20% stake in Innocent for 30 mln GBP in April 2009
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To avoid being crushed, like the fruit it sells, by Coca-Cola, its new minority owner with a 20% stake, Innocent will need to independently secure production capacity and routes to market in continental Europe. This won't be easy, but we believe one option is to find a 'third-way' agreement, something like a premium private label strategy, but with a brand attached, with Refresco.

Innocent pioneered fruit smoothies in the UK ..Innocent is the first -mover, no.1 player and innovation leader in the smoothies market in the UK. For purists, smoothies are mixes of fruit that has been crushed, de-frozen and pasteurised. More broadly, smoothies are the flagship of the new generation of healthy 100% pure fruit chilled drinks.

... but has suffered since 2008 ...Billed as having 67% branded market share in the UK, Innocent has been under pressure since 2008 from the recession, and from competition coming especially from private label. This caused a decline in sales by over 10% in 2008, to around 100 mln GBP, as well as losses (see profile); the scenario is likely to be similar in 2009.

Those results are a big shock for a company that had previously enjoyed a CAGR of 90% (2004 -7), and had been profitable every year, with its EBITDA margin reaching 14% in 2007.

... seeking a solution in European expansion ...To reverse this trend, the company has sought to expand in continental Europe. Having opened a string of offices in those geographies, and some fledgling sales especially in Scandinavia, Innocent decided to organise a tender, to select a strategic minority investor that would provide capital and distribution clout in Europe. Unsurprisingly, Coca-Cola was chosen.

... with the help of giant CokeCoca-Cola, like other multinationals in soft beverages, has demonstrated a strategy of taking 'punts' on several next-generation players, like Innocent, in the expectation that one of them will turn into the next Coke. They're doing the job that venture capital would do, if it was interested in beverages.

The first step towards joint distribution was taken at the end of 2009, when it was announced that Coke will handle Innocent's sales and distribution in Sweden.

Innocent could be ignored by Coke's distribution system ...But ultimately, what chance is there that Coke's salesforce will focus on the Innocent brand, especially when the group doesn't even own it ? Innocent's sales in Europe, ex -UK, came to est. 15 - 20 mln GBP in 2009. That's less than half of one percent of what Coca-Cola sells in that region.

... with consequences for the alliance and for Innocent itselfThus distributing Innocent through Coke's system is likely to fail. If so, then the leviathan of opinion in that corporation will turn against little Innocent. After that, relations between the two companies, who have set up a joint investment committee, are likely to become strained.

If that happens then the future of Innocent itself could be in jeopardy; it could end up like PJ Smoothies did, under Pepsico, in 2005.

Refresco might provide the answer instead ...We believe that to genuinely succeed in Europe, and to avoid being crushed by Coke, Innocent will need not only distribution but also manufacturing capacity there; one option to achieve that is for the company to team up with Refresco.

That group positions itself as the no.1 manufacturer of private label and branded co-packed soft drinks and juices in Europe, and has about 20 production facilities spread across the continent.

A deal betwen Refresco and Innocent could combine the cost leadership of the former, with the premium pricing of the latter, to create enough margin to be shared between the two.

... in both production and distribution in Europe ...Innocent already outsources its production, in the UK. In Europe, Refresco offers aseptic PET packing capacity, and some NPD capability, close to markets in all major geographies.

Distribution is more difficult, as Refresco is focused on private label supply. However, the Innocent brand could be positioned in stores like a premium private label offering.

There are precedents for that; for example Sturm Foods in the US, whose drink mix brands communicate to the trade rather than to consumers.

... allowing Innocent to focus on key strategic investmentsSuch an arrangement with Refresco might allow Innocent to allocate the money raised from Coca-Cola to strategic marketing and new product development. (NB. 'veg pots' are not the way for the business to go).

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THIS LEAD'S VALUATION
Size (€ mln) 170
Sector smoothies
Asset Quality UK no.1 branded
Seller private founders
Buyer large plc
P/S 1,5
P/Ebitda -20,0
Type minority stake
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