Glenboden M & A Originations

C&C a pure-play cider & beer candidate after spirits disposal

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Origination Status seller announcement, April 2010
Asset Spirits and Liqueurs division of C&C Group (Ireland), portfolio led by 'Tullamore Dew' Irish whiskey
Buyer William Grant & Sons Ltd (UK), global Scotch whisky business
Seller C&C Group plc (Ireland), leading cider producer in Ireland and the UK
Buyer Rationale broadening of portfolio with leading Irish whiskey brand
Seller Rationale attractive valuation, lack of scale in spirits business, focus on cider division
NBs C&C's cider brand portfolio includes Bulmers, Magners and Gaymers, as well as Tennent's lager
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Glenboden has long argued that C&C should sell its cider and spirits businesses, as it didn't have the scale to succeed in either. Having now beefed -up its cider division, through two acquisitions, and having sold its spirits arm, C&C has become a mid -sized LAD specialist in the UK, providing a bolt -on acquisition opportunity for majors especially A-B InBev and Carlsberg.

Strong cider brands ...Up until 2009, C&C's cider division comprised two main brands, 'Bulmers' and 'Magners'. Bulmers is the leading cider brand in Ireland, and Magners is the leading on-trade cider brand in the UK.

... sales decline in main markets ...C&C's sales revenue has been in decline in recent years (see chart). That's due in part to the sale of its soft drinks business, CCSD, to Britvic in 2007. However, it's also due to consistent falls in sales in both its cider and spirits divisions.

In 2009, for example, Bulmers volume sales fell by 10%, roughly in line with the overall Irish cider market. Meanwhile Magners volume fell by 2%, in spite of 8% growth in the total UK cider market.

... need for bigger scale and portfolio ...One problem is that C&C lacked the scale in distribution enjoyed by its major competitors, such as Heineken. In fact it could be described as only a 'single brand company', in each of its core markets.

That's all changed in FY 2010 (y/b 01.03.09), owing to two major acquisitions that have increased C&C's cider division's sales from € 385 mln in 2009, to est. € 650 mln in 2010; an increase of about 67%.

... M&A and specialisationin September 2009, C&C acquired the Scottish, Northern Ireland and Republic of Ireland brewing operations of A-B InBev. Then in November 2009, the group bought The Gaymer Cider Co from Constellation Brands' UK cider division.

As a result of these deals, C&C now has a 5 mln hl. volume business, that is a leader in the premium cider market in the UK, and has a presence in all segments of the cider market in the UK and Ireland. It also includes the market -leading 'Tennent's' lager brand in Scotland.

In April 2010, the sale of C&C's spirits' portfolio, led by the 'Tullamore Dew' Irish whiskey brand, to William Grant, (see valuation), leaves the group as a mid -sized, pure -play LAD ('long alcohol drinks') producer in the British Isles.

An acquisition candidate going forward ...What will be the group's next M&A move ? We don't think it will add significantly to its cider /beer portfolio, and is more likely to offer itself as an acquisition target.

... portfolio management and cashflow generation model ...C&C's history shows it to be a group that likes to 'turn over' its portfolio regularly, through M&A activity, in the interests of its shareholders. Since 2005, it has sold three businesses (snacks, soft drinks, spirits), and bought two (cider, beer).

In parallel, the group focuses on consistently delivering high margins, and strong cashflow, even at the expense of organic growth. In H1 2010, C&C delivered an EBITDA margin of 25% (see chart), and free cashflow equal to 83% of EBITDA. Meanwhile its total sales revenue fell by 11%.

Putting these features together, we predict that C&C will now streamline its cider division, look to sell it to an LAD major, return the proceeds to its shareholders, then enter a different food & beverages category through another acquisition.

Who might be the buyer of C&C's cider division, down the road ? We look at rationale for both A-B InBev and Carlsberg.

... potential InBev buy -back ...Through acquiring its businesses in Scotland, Northern Ireland and Ireland, C&C has become the strategic partner for A-B InBev in those markets, where it will distribute the latter's international brands (Beck's, Stella Artois, Budweiser).

A-B InBev's main rationale for selling that business was to help raise the US$ 7 bln that it had targeted, through disposals, to reduce its debt after the mega-merger of InBev with Anheuser-Busch in 2007.

In its other post -merger disposals, notably the sale of its CEE brewing operations to CVC, and the sale of Oriental Brewery in Korea to KKR, both in 2009, A-B InBev has an option to re -acquire the businesses at a later date, when the group's balance sheet has recovered. A similar deal might well be embedded in the C&C transaction.

The strategic alliance and likely re -purchase option point to A-B InBev as a potential acquiror of C&C's cider division in future.

... Carlsberg interest in UK cider brandsAnother contender to buy C&C is Carlsberg. That group is keen to strengthen its UK operations, where it lost out to Heineken in the carve-up of Scottish & Newcastle in 2007; it remains as only the no.4 player in that market.

Carlsberg is also eager to develop its non –beer business across Europe; C&C's 'Magners' cider brand has already made trials in Spain and Germany.

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Size (€ mln) 300
Sector spirits
Asset Quality Irish whiskey global
Seller mid-cap plc
Buyer private corporate
P/S 3,5
P/Ebitda 18,5
Type cash consideration incl. inventory
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