Glenboden M & A Originations

Further acquisition options for Campari

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Origination Status proprietory origination, September 2010
Asset Carolans, Frangelico and Irish Mist liqueur brands (Irish cream, Italian hazelnut)
Buyer Gruppo Campari (Italy), global no.6 spirits producer
Seller William Grant & Sons Ltd (UK), major international whisky producer
Buyer Rationale brands, margins, US and emerging market presence in liqueurs
Seller Rationale acceptable valuation, focus on core whisky portfolio
NBs William Grant acquired these liqueur brands, together with Tullamore Dew, from C&C Group earlier in 2010
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Campari's acquisition strategy could be described as cunning. It looks to buy spirits and liqueur brands that have a low profile, or are the subject of a re-sale, at valuations nearly always below x10 EBITDA. We identify some new candidates that could meet that criteria, as Campari continues its acquisition run.

History of low valuations ...Campari has acquired the Carolans, Frangelico and Irish Mist liqueur brand, from William Grant, at a very attractive price, compared with the cca. x20 EBITDA paid by competitors in recent years for global or stellar brands like Absolut vodka or Tullamore Dew whiskey (see valuation).

Looking at the 10 or so wine & spirits brands bought by Campari, in the last decade, only in one case, that of Wild Turkey from Pernod Ricard in 2009, did the group pay more than x10 EBITDA.

... 'trademark' acquisition criteria ...The M&A strategy behind this history of cheap acquisitions lies in buying brands that are either low profile cum niche, or are re-sold in the aftermath of a larger portfolio acquisition.

Examples of Campari's low profile deals, where it's likely they weren't in a bidding war, are Cabo Wabo tequila and X-Rated fusion liqueur in 2007; also Skyy super premium vodka, bought in instalments since 1998.

Cases where the group acquired 're-sold' brands include Wild Turkey (from Pernod Ricard after the Absolut deal in 2008); Glen Grant (in the wake of the Allied Domeq break-up in 2005); now these three liqueur brands, divested by Wm. Grant after it bought a portfolio headed by Tullamore Dew.

... continued M&A essential to growthGenerally Campari's portfolio has few brands that compete head-on with the bigger global players, in mainstream categories like premium vodka or whisky. That's consistent with the group's Campari and Cinzano brand heritage.

The downside of this strategy is that, although Campari has been able to keep a high level of profitability, the lack of scalability of these smaller brands in minor categories is reflected in the group's low sales growth rate (see profile).

The solution for Campari, to boost that growth rate, can only be 'more of the same'; i.e. more acquisitions of lesser known and cheaper brands. That's been more-or-less confirmed in statements by the group's CEO.

€ 200 mln available for one or several deals ...Turning briefly to financials, Campari's CEO has also said that the group's pro forma net debt, after this latest deal, will be x2,5 EBITDA, when Campari's bank covenants allow it to go up to x4,5 EBITDA.

Making certain assumptions about 2010 performance, we calculate that the above translates into a 'war chest' of around € 400 mln.

Given a big slug of Campari conservatism, in practice we predict that about half of that amount will be available for further acquisitions into 2011.

... target brands profile in placeSo criteria for identifying M&A targets for Campari : up to € 200 mln deal; low profile or niche or re-sold brands; keen valuation. Geographically, apparent and stated M&A strategy point to the US and emerging markets as preferred.

Castle loss-making with some good brands ... As at 2010, Castle Brands in the US has nearly US$ 100 mln in accumulated losses. It can't claim that's due to start-up investment, as the group has been around for about 10 years and, most significantly, is not growing.

The strongest brands in Castle's portfolio are Gosling's rum and Jefferson's bourbon, in the US. Those brands could add around US$ 20 mln in sales to Campari, most likely at a low valuation; Castle is AMEX listed.

... Blavod high-growth with quirky brands ...Blavod Wines & Spirits in the UK is a niche player. Its portfolio includes 'quirky' brands like Blavod, a black vodka with a youthful and spooky image; also Blackwood’s, a 'vintage' gin made from hand-picked botanicals.

A young, AIM listed company, Blavod grew its sales by 40% in 2010, but only managed to hit break-even at the EBITDA level, owing to the brand support and overhead costs needed to fuel growth.

That company would add UK niche brands, with some proven US potential, and about € 10 mln in revenues to Campari.

... Mount Gay non-core for indebted RemyRemy Cointreau is a group with a history of relatively low profitability and debt refinancings. For a while it has been close to breaching its covenanted maximum net debt ratio of x3,5 EBITDA.

The group's core business, delivering 60% of sales, is cognac. That division grew by over 30% in both 2009 and YTD 2010. Meanwhile Remy's spirits & liqueurs business has stagnated.

Selective divestments from that division could help solve Remy's perennial debt issues. It includes strong brands, like Mount Gay rum with its yachting associations. That brand would add € 20 mln in mostly US sales to Campari.

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THIS LEAD'S VALUATION
Size (€ mln) 130
Sector spirits (liqueurs)
Asset Quality international branded niche
Seller private corporate
Buyer large plc
P/S 2,5
P/Ebitda 7,5
Type enterprise value
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