Damian McNeela from Panmure Gordon said his brokerage’s first reaction to the deal – which would create a new group with estimated sales of ₤1.542bn (US $2.457bn) for FY 2012 – was that it was more attractive for Britvic shareholders than AG Barr shareholders.
Panmure moved from a ‘sell’ to ‘hold’ rating on Britvic’s stock pending further clarity on the synergies resulting from a deal, and McNeela said: “We believe Britvic’s shareholders should benefit from an improved balance sheet and improved underlying earnings quality of an enlarged group.”
There was a low risk of a counter offer for Britvic since debt levels (2.8x net debt/EBITDA for 2012) and low free cash flow yield (FCF) would deter private equity bidders, McNeela said.
“Suntory, the Japanese Pepsi bottler could emerge as a potential bidder, but we think this is also unlikely for similar reasons,” he added.
‘Stumbling block’ for private equity
Phil Carroll, an analyst at Shore Capital, said the merger suited both parties, but seemed a better result for Britvic’s shareholders than Barr’s as it was the “next best thing to a cash take out”.
Itgave Britvic shareholders a solid management and business solution after a period of underperformance, greater financial strength and a higher percentage of owned brands (AG Barr's include Irn Bru, Barr and Tizer, while the firm produces Orangina under license from Suntory), he said.
“We believe PepsiCo was a likely stumbling block to private equity being involved, with PepsiCo preferring a more strategic partner [so] the number of suitors was always going to be limited,” Carroll said.
“With a PepsiCo director on the Britvic board, we assume that this potential deal has its blessing,” Carroll said, adding that Diageo was unlikely to move for Britvic due to its current Jose Cuervo focus.
Strong choice of new CEO?
Roger White was a strong choice as new combined entity CEO, Carroll said, but he noted that despite several profit warnings since his firm’s listing, Britvic CEO Paul Moody recently won back share: for Pepsi while Coke sponsored the Olympics, and for Robinson’s against own-label competition.
“That said, the Fruit Shoot recall has come under his watch, so a change is likely to be taken well by the market,” Carroll said.
Concerns over Britvic’s management given the firm’s poor acquisition record and the ‘MagiCap’ debacle should also be removed under the structure of the new group, McNeela said.
“AG Barr holders should theoretically benefit from increased balance sheet efficiency and greater exposure to international markets.
“However, some investors may find this difficult to accept given the near-term pressures being experienced [by Britvic] in Ireland and France.”
Synergy savings assumption
Carroll said Barr’s shareholders should see overall value creation if the merger went through, but that what Britvic’s shareholders gained in terms of brands and fiscal strength, Barr’s arguably lost, while they also gained access to a business with a more mixed track record.
McNeela said Panmure anticipated synergy savings of around ₤25m due to the removal of duplicated central functions and a further ₤50m additional procurement/distribution savings.
He suggested that the new group could save a further ₤75m by expanding AG Barr’s new Milton Keynes site further following its opening in Q3 2013, and closing some existing Britvic facilities.
AG Barr is investing ₤40 in Milton Keynes, while Britvic recently deferred a capital expenditure program relating to a new Fruit Shoot line in France.
“We have used a synergy savings assumption of ₤150m, which would equate to around of 10% of revenues, but this assumes that the Milton Keynes site receives further investment allowing for the closure of some of Britvic’s existing facilities,” McNeela wrote.
“As such there is no guidance on the magnitude of synergy savings at the moment.”