The omission in Carlsberg’s £3bn-plus takeover tilt for Britvic, the UK soft drinks firm behind Robinsons barley water, J2O, Tango and R White’s lemonade, has been resolved.
The Danes, pursuing their “beyond beer” strategy, did not forget that PepsiCo could kill the whole adventure by yanking the UK bottling rights for Pepsi, 7Up and Lipton’s Ice Tea from Britvic under a “change of control” clause. The US fizzy drinks titan had agreed to waive the clause if the deal happened, Carlsberg said on Monday.
Since nobody in their right mind would buy Britvic without those rights, this takeover tale would now seem to come down to the simple matter of price. Britvic has already rejected offers at £12 and £12.50 a share, it told the market on Friday. At what level would its board be obliged to surrender in usual boring fashion and declare that fair value has been reached?
Well, one hopes the Britvic directors have stiffened their resolve with something stronger than a Fruit Shoot. If they truly believe their bullish talk in last month’s half-year numbers about “market-leading growth”, “multiple new growth spaces” and “our long-standing track record of delivering outstanding returns for our shareholders”, they should be up for a scrap.
The point about Britvic is that, for the first time in ages, it can look forward to vaguely normal trading conditions. After a sugar tax, a pandemic –which clobbered high-margin sales to pubs and restaurants – and then a burst of inflation in raw materials for packaging and so on, life looks OK.
The soft drinks market offers few examples of explosive growth (Fever-Tree was an exception) but Britvic’s wider portfolio can be expected to deliver sales growth of 5%-ish, double-digit margins and enough cash for modest share buy-backs, which have been £75m in recent years. By way of add-on excitement, it has a smaller operation in Brazil that is growing at a decent clip.
Before the pandemic, the shares were around the £10 mark and the return to close to that level, before Carlsberg showed up, was justified by the numbers. City analysts expect profits to top £200m this year and earnings per share to improve at a steady rate of 10%-ish for the next couple. The board’s rejection of £12.50 as a “significant undervaluation” was justified.
Perhaps surprisingly given its size and the fame of its core brand, Carlsberg looks to be the party with the strategic conundrum. Its beer business in the UK, a joint venture with Marston’s, is No 4 in the market. It would prefer the UK, rather than China, to be its biggest market. And it wants to be less reliant on beer at a time when per-capita consumption of alcohol is falling in western Europe. So Britvic, offering easy savings in distribution costs in the UK, makes for an understandable purchase. But those factors also mean the target should be prepared to play hard to get.
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Investec’s analyst, Matthew Webb, thinks £13.50, or a 39% premium to the share price before the fun started, “would be enough to get the deal done”. But, actually, there’s a fair argument that Britvic’s board should hold out for more: think £14 to surrender independence. Remember, you only get to sell the company once and the UK market can be terrible at valuing FTSE 250 companies fairly. Only fizzy terms should do.
