Glenboden M & A Originations

What are Cott's best strategic options now ? (pt. 1)

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Origination Status proprietory origination, February 2014
Asset Cott Corporation (USA), largest domestic bottler of private label and A-brand soft drinks
Buyer options include Walmart
Seller public shareholders of Cott
Buyer Rationale back-integration to enhance pricing security in key categories
Seller Rationale realisation of shareholder value, sales and margins stability
NBs Credit Suisse recently appointed by Cott to evaluate strategic options for the group
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On the back of weak results in 9M 2013, Cott has appointed Credit Suisse to evaluate all strategic options that “would enhance shareholder value'. In part one we examine some of those options, including geographic diversification as well as consolidation with a branded competitor.

Geographic diversification a big challenge ...On the face of it, geographic diversification is the obvious route for Cott, since north America and the UK currently account for 95% of the group's sales. Surely there's major scope for Cott to grow by following its multiple retail and A-brand customers into continental Europe, or BRIC or other emerging regions ?

However as its starting point, Cott's only experience of moving beyond its ‘safe havens’ of north America and UK, namely into Mexico, has been poor. Apparently the group 'lost money for five years' after entering that market, through a JV in 2002, and Mexico still delivers only 2% of total sales.

Then there’s the problem that the relatively ‘safe’ continental Europe market has growth rates that don’t excite Cott's management. Besides, the group would have to face Refresco in any acquisition battleground in Europe - an aggressive player that’s grown from nothing to over 20 plants and nearly 2,5 bln EUR in sales, in just 15 years.

... with emerging markets still too smallAs for emerging regions with strong growth prospects, the largest and most exciting of those, notably BRIC countries, are still too under-developed in their retail sectors for a predominantly private label player like Cott to achieve significant volumes.

Glenboden understands that the group is considering central Europe, which offers both market growth and a relatively developed retail sector. However, the bottling industry is still too fragmented in that region; even a 25 mln EUR turnover business is quite big in e.g. Poland.

We believe then that geographic diversification can be excluded from Cott's strategic options for significantly superior performance, at least in the near term.

So how about racier options for enhancing the group's shareholder value, like consolidation or private equity ?

Limited consolidation opportunities ...A year ago, the biggest deal for Cott would have been a merger with Refresco, a parallel business covering continental Europe in a similar way to how Cott covers the Anglo-Saxon world.

However in 2013 Refresco acquired Gerber Emig, radically changing its product and geographic mix and increasing group sales revenue by over 50%. It will take quite a while for Refresco to digest that merger, and then look beyond it.

Looking instead at Cott's home market, in theory a tie-up with one of the big four national branded players, notably Dr Pepper Snapple, would consolidate the market, alleviate competitive pressures and enhance bargaining power with the multiple retailers. One of the biggest drags on Cott's results, after all, is heavy promotional activity by branded competitors in north America.

However there's a fundamental mis-match between branded players like Dr Pepper Snapple, and contract bottlers like Cott. Apart from the obvious conflict of interest inherent in the same organisation pitching both branded drinks and private label equivalents to retailers, Cott might no longer be able to bottle for other branded players, like Coca-Cola.

So, Cott's further consolidation options may be limited to 'mopping up' more small players, like they've been doing in recent years in the UK market through buying Sanx and Calypso. The group's net debt also limits the size of potential new bolt-on deals (see profile).

In any event, such bolt-on deals only provide incremental benefits for the group, without any major shareholder value lift.

... and private equity buy-out unlikelySee part two ...

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THIS LEAD'S VALUATION
Size (€ mln) 1.100
Sector soft beverages
Asset Quality north America no.1 private label
Seller large plc
Buyer large plc
P/S 0,7
P/Ebitda 8,0
Type enterprise value estimate
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