Glenboden M & A Originations

Might Orangina bid for AG Barr in UK ?

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Origination Status M&A analyst opinions, October 2010
Asset AG Barr plc (UK), no.5 domestic soft drinks producer
Buyer candidates include Orangina, Britvic
Seller founders and shareholders of AG Barr
Buyer Rationale expansion in CSD, UK and at-home markets (Orangina); stronger no.2 position in CSD market in UK (Britvic)
Seller Rationale timing, valuation, consolidation pressures going forward
NBs Suntory acquired Orangina in 2009 for a reported €2,6 bln
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For some time AG Barr has been ripening as a target in the soft drinks world, where M&A consolidation candidates are relatively few. The group's improved performance in H1 2011 makes this more likely. Orangina is the best placed bidder, bank-rolled by its new owner Suntory. Britvic needs time to digest its Fruite acquisition in France first.

Financially sound and consistent ...In recent years, AG Barr has maintained a steady rate of growth, a high EBITDA margin, and ever-lower debt (see chart).

In H1 2011, Barr's sales growth in the UK accelerated to 14%, estimated by management to be twice as high as that of the soft drinks market as a whole.

... maybe lacking in scale ...On the other hand, the fact that it has a weak no.5 position in its core UK market, with about 5% share, makes it vulnerable going forward as consolidation pressures increase.

... resilient CSD brands and growing stills potentialBarr is still very dependent on CSDs, which deliver nearly 80% of sales. Although that segment appears to be in general decline in the long term, for health reasons, the 'quirky' nature of its flagship 'Irn-Bru' brand, and the strong heritage of its 'Tizer' brand, povide some resistance to this trend.

Also, the group's stills portfolio, with its better-for-you potential, was greatly strengthened by the acquisition of the Rubicon portfolio in 2008, which includes Rubicon exotic juice drinks, Vitsmart enhanced water and Taut sports drinks.

Indeed, Rubicon is the fastest-growing brand in Barr's portfolio, having jumped in sales value by nearly 40% in H1 2011.

Orangina a new acquiror ...In 2009, Suntory of Japan bought Orangina, which claims to be the no.3 soft drinks player in Europe, and the no.2 in the stills category, from the private equity firms Blackstone and Lion Capital.

AG Barr could provide an excellent bolt-on acquisition for Orangina, bank-rolled by Suntory, for reasons of geography, brands and portfolio balance.

... needs reach, fresh brands, balance ...Orangina aspires to being a 'pan-European' business, but most of its sales are in France, Spain, Italy and, after buying Rosinka in 2007, Ukraine. Barr would add the large and high-value UK market as a core geography for the group.

Also, Orangina's existing brands are tired and under-invested. Orangina itself peaked as a brand some time in the 1990s, and the group appears to be increasingly focused on the on-premise channel and on private label sales.

Barr would add 'fizz' to Orangina's portfolio, enhancing its presence and growth in the branded CSD segment as well as the at-home channel.

... backing of cash-rich SuntoryIn spite of having purchased Orangina in 2009, as well as Frucor, New Zealand's market leader in soft drinks, in 2008, for a combined amount of up to € 3 bln, Suntory still has 'deep pockets' for further acquisitions.

Earlier in 2010, it announced that it was looking to spend another € 4 - 5 bln on acquisitions, over the next five years; if necessary with the help of an IPO.

This is in the context of the famous 'race' between the Japanese food & beverage giants, Suntory, Kirin and Asahi, to expand overseas in order to compensate for their hugely cash-generative, but declining, mainstay Japanese beer market.

Competition for Barr may be weak ...A bid by Orangina for AG Barr might have the other advantage of not being contested by the obvious other contender for that target, Britvic.

On paper Barr would be an excellent fit for Britvic. Already no.2 in the CSD market in the UK, with about 15% share, Barr's 5% would greatly strengthen the group's lead over GSK and Red Bull, who both have around 10% share.

However, in the middle of 2010 Britvic announced the acquisition of Fruite Enterprises, market leader in the syrups category in France ('Teisseire' brand). That could be interpreted as an alternative purchase to Barr in financial terms.

... Britvic over-indebted ...Already having net debt ratio of x2,8 EBITDA pre-deal, the purchase of Fruite, which required a private placement of US$ 250mln of additional debt, has increased that ratio substantially.

Taking the Fruite deal as a comparative transaction (see valuation), the additional purchase of AG Barr would probably push Britvic's net debt way above the group's covenants, for some time to come.

... Coke and Pepsico focused elsewhereSome analysts have tipped Coca-Cola and Pepsico as likely to be interested in AG Barr. We think it's unlikely that either wants to buy an 80% CSD business in developed markets now.

It's well known that both of these giants are focused rather on non-CSD, better-for-you soft drinks acquisitions; examples range from Glaceau enhanced waters in the US to Lebedyansky fruit drinks in Russia.

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THIS LEAD'S VALUATION
Size (€ mln) 450
Sector soft drinks
Asset Quality UK no.5 branded
Seller mid-cap plc
Buyer private corporate
P/S 2,0
P/Ebitda 10,0
Type value estimate
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