Glenboden M & A Originations

A good time for Refresco Gerber's shareholders to exit

Priority Rating priority rating 5
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Origination Status market rumours of bid, December 2014
Asset Refresco Gerber BV (Holland), no.1 private label soft drinks bottler in Europe
Buyer candidates include Blackstone, KKR
Seller Icelandic consortium, Hanover Acceptances, 3i, management
Buyer Rationale future upside through restructuring, further acquisitions, changes in product and channel mix
Seller Rationale attractive valuation, timing
NBs Blackstone is said to present a 1,5 bln GBP bid by the end of 2014
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In November this year, Refresco Gerber announced that it was 'exploring capital structure alternatives', and had hired J.P. Morgan as advisors for that. In the M&A world, such language is often code for 'trying to find a buyer'. Now in December we hear a rumour that Blackstone is lining up a 1,5 bln GBP bid for the group. Could it be that Refresco's shareholder's see an opportunity to exit the business, on the back of strong post -merger performance ?

Positive financial profile ...It appears that the two-year post -merger integration programme at Refresco, following the acquisition of Gerber Emig in November 2013, is well on track, with management citing synergies from that integration as the main factor behind strong performance, especially in operating profit and cash flow, in 2014.

This allows the picture to emerge of a group that has high medium-term sales growth; plus an EBITDA margin of around 10%, which is quite high for what's mostly a private -label bottling business (see profile).

Even Refresco's historically high net debt, the product of an aggressive strategy of growth through acquisitions extending back over a decade, is now below x4 EBITDA and apears to have been reduced further in 2014, mostly through the 75 mln EUR repayment of a revolving credit facility in Q3.

... plus strategic strengths ...After the acquisition of Gerber Emig in particular, Refresco has the profile of a strategically well -positioned and balanced business. For a start, Refresco is now the clear leader in Europe in soft drinks and fruit juice bottling for retail and branded customers.

Geographically, sales are well spread across Europe, especially the largest markets, with Germany, Benelux, UK and France each accounting for roughly 20% of sales revenue. In terms of sales by product the division between fruit juice, CSDs and water is also quite well balanced.

Moving on to channel mix, the market in Europe is generally under constant margin pressure thanks to the growth of hard discounters at the expense of traditional retailers. However Refresco, thanks to its scale, is best placed to benefit from that trend.

... whilst leaving upside for new owner ...At the same time, there are still goodies in store for a potential new owner of Refresco, in terms of value enhancement through further restructuring, acquisitions and organic growth.

The group is currently implementing a restructuring plan that includes factory sales and other efficiency measures in Germany and the UK. However, with a total of 26 manufacturing facilities spread across Europe, there's still room for more - apparently private label logistics dictate that a single factory can efficiently serve cusomers in up to a 300 km radius.

On the acquisition front, the European bottling industry is still very fragmented, especially in the CEE region where Refresco's presence is relatively small. Plus the group's organic growth upside - in areas like RTD tea and energy drinks, and in increasing the proportion of contract manufacture for A brands (currently under 20% of total revenue).

... all justifying a high valuation ...Generally valuations are welling upwards in food & beverage M&A, we believe as a result of a 10 -year financing cycle that begins around the middle of each decade. Look no further than the x20 EBITDA or more that Suntory paid for Jim Beam earlier this year.

Of course valuation multiples for private label bottlers, like Refresco, are far lower than those for branded players like Jim Beam. However Refresco now, more than ever, can command a significant premium to reflect its scale. In a fast -consolidating retail environment in Europe, only the largest bottlers will keep up with the 3 to 5 retail groups that apparently will be left standing by 2020.

So put into hard numbers, we can estimate that while Refresco pays up to x8 EBITDA for small, independent bottlers around Europe, the scale premium that its own equity can command should be at least 50% above that, which translates into an EBITDA multiple of x12 (see valuation).

... and encouraging a 'capital structure alternative'

According to the rumour, there are two large private equity firms preparing a bid for Refresco, namely Blackstone and KKR. Certainly in the case of KKR that makes sense, after their failed bid for Treasury Wine Estates a few months ago; they must be itching to get the same money out of the door and into another beverages business.

Post -merger, Refresco Gerber's shareholder base includes 72,5% held by Refresco shareholders (an Icelandic consortium, private equity firm 3i and management), and 27,5% held by Gerber Emig's shareholders (Hanover Acceptances). It seems that the Icelanders are the largest single shareholder.

3i reinvested in Refresco in March 2010 for a 20% stake, so are likely to be interested in a 5 -year exit horizon. They're certainly 'in the money' now, having paid only € 84 mln for that stake.

The Icelandic consortium has been there since before the 2008 financial crash, exceptionally holding onto their shares while selling off most of their other assets in the crash; so they are long over-due for an exit. As for the family -owners from Gerber - well, maybe they'll just agree to tag along, or stay put.

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THIS LEAD'S VALUATION
Size (€ mln) 2 280
Sector soft beverages
Asset Quality Europe no.1 unbranded
Seller private equity
Buyer private equity
P/S 1,2
P/Ebitda 12,0
Type enterprise value estimate
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