While health campaigners are happy that young people seem to prefer soft drinks over alcohol, companies who produce the stronger stuff is concerned. It is possible that sales will fall and profits will drop.
Carlsberg was among those who considered their options, and decided to join the Danish brewery if they couldn’t be beaten. In order to serve a younger and more moderate generation in Britain, the Danish brewer has decided to purchase Britvic’s portfolio of alcohol-free products for £3.3 billion.
It is not that they are giving up beer. The same day it accepted its Britvic bid, it announced it had also acquired Marston’s share in their combined brewing company, Carlsberg Marston’s Brewing Company for £206million. The joint venture (formerly) produces brands such as San Miguel, Brooklyn Pilsner, and Hobgoblin to UK retailers.
Peel Hunt analysts said that the two deals demonstrated Carlsbergwas “making a large play on the UK market”, and the group will have “significant distributor power”. The bigger deal is Britvic, both in terms of numbers and implication.
In the 1930s, the British Vitamin Products Company was formed when a Chelmsford, Essex chemist began making homemade soft drinks to give to the poor. It has 39 brands sold in over 100 countries including Robinsons Iced Coffee, Teisseire Plenish and Jimmy’s Iced Coffee. It also has a deal with PepsiCo for the exclusive production and sale of Pepsi and Rockstar Energy in Britain and Ireland.
Carlsberg has responded to the trend of people drinking less alcohol by purchasing Britvic. According to IWSR – a drinks industry expert – half of UK adults will buy a low or no alcohol product in 2022. It is therefore looking beyond beer. It has a five-point plan that includes plans to boost sales of non-beer-related products under its “Beyond Beer segment”.
Beer maker sees opportunities for growth in the soft drink market
Carlsberg revealed its strategy in this year’s annual report, noting that non-beer volumes accounted for just 2 percent of the total volume. It said that it was time to focus more on the long-term and make sufficient investments for our future growth. We aim to grow our Beyond Beer business by increasing investments in brand building, innovation, footprint extension and execution.
Britvic is Britain’s largest brand-named still soft drink producer and second largest carbonated beverage producer. Jacob Aarup Andersen, chief executive at Carlsberg, stated that the deal would be attractive to its shareholders as it would support the group’s ambitions for growth and deliver an increase in earnings three years after the completion of the transaction.
He said: “With this deal, we combine Britvic’s portfolio of high-quality soft drinks with Carlsberg beer and its strong route-to market capabilities to create an enhanced offering across the UK as well as markets in Western Europe.” “We are committed in accelerating commercial and logistics investments in Britvic. We are confident that Carlsberg Britvic, with its comprehensive portfolio of leading brands in the UK market, will be the preferred multi-beverage provider to UK customers.”
J20 is yet another well-known Britvic brand acquired by the Danish brewery
Graham Simpson, a Canaccord Genuity analyst on the Quest platform said that Carlsberg’s new strategy meant “Britvic is more important to Carlsberg than Carlsberg is to Britvic”. Britvic is a key component of Carlsberg’s overall strategy. Carlsberg has a rare opportunity to accelerate the growth of its soft drinks sector, given that there are few quality assets in this area.
Once it’s gone it’s not coming back. It is rare to find companies with such high and consistent cashflow. We would therefore urge investors to expect an incredible price, not just a fair price.
Andrew Ford and Charles Hall at Peel Hunt said that the offerwas ‘light’, given the strategic pressures on Carlsberg. The deal will not fail because Carlsberg has a strategy that “will not allow it to fail”.
Britvic is heavily dependent on Pepsi brands, and the company had already approved the deal. Britvic had distribution and sales rights covered by a clause in the American giant’s change-of control agreement. However, it signed a waiver to waive that clause if the deal proceeds. Silviu Popovici is the chief executive officer of PepsiCo Europe. He said that the deal will allow both companies expand into new markets.
Carlsberg stated in its investor statement that the deal will “further enhance” its relationship with PepsiCo as both companies are already partners in other markets across Europe and Asia. Carlsberg said that it had agreed to certain terms for Britvic’s bottling agreements, which would take effect upon completion of the purchase. Carlsberg will become PepsiCo’s largest bottling partner after the acquisition.
Analysts at Bernstein who follow Carlsberg stock have described the deal as “a good one, and at a reasonable price”, although they added that it was less than what they expected. The analysts had expected Carlsberg to be willing to pay £14 per share.
RBC Capital Markets’ James Jones and Emma Letheren said that they were “underwhelmed by Carlsberg’s decision”, given the previous focus on Asia. Carlsberg said in February it considered Asia to be a “key value and volume driver” for the group and that it “was committed to growing in China”.
“Strategically, we are doubtful,” they said. “We feel underwhelmed by the Carlsberg acquisition, even though Carlsberg claims that it will transform the UK business.
Carlsberg has recommended a higher offer than that rejected a few months ago, claiming that the previous bid “significantly underestimated” the company (writes Lauren Almeida). The new offer represents a 36 per cent premium over the closing share price of the company before takeover speculation began, and also promises a 25p dividend special before the transaction is completed.
Britvic is a good fit for Carlsberg. Cashflow returns have averaged 14% over the last 15 years. Britvic has strong brands like Robinsons that give it an extra layer of resilience.
Carlsberg will also be able to diversify their portfolio with the addition of soft drinks, which is important given that Gen Z may not drink as much alcohol. The two businesses are Pepsi Bottlers and should be able find savings.
What will Britvic shareholders gain from this? Analysts at Canaccord Genuity said that while it would accelerate the company’s geographic ambition, Carlsberg needed Britvic more than Britvic needed Carlsberg.
Britvic announced yesterday that revenues were up 6 percent in the third quarter, and volumes increased 2 percent. This suggests that Britvic has performed well in this tough market. Analysts at Canaccord said that Britvic’s shares would still trade between £14.41 and £15.53 in the next four-year period, despite their bear case predictions. This is significantly higher than Carlsberg’s £12.90.
Carlsberg also knows that this is not a big deal. A special dividend offered as an incentive suggests they are aware of it.
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