- Analysts “bemused” by offer
- Both companies are PepsiCo bottlers
Danish brewing giant Carlsberg (DK:CARL) is having trouble convincing the market that an acquisition of soft drinks maker Britvic (BVIC) wouldn’t prove a costly error, with investors giving the takeover attempt a resolute thumbs down.
The two companies’ shares have moved in opposite directions since it was revealed on 21 June that Britvic rejected two takeover proposals – at 1,200p and 1,250p a share – from the Tuborg and Kronenbourg owner earlier in the month. Over the past four weeks, Britvic is up by almost a quarter while Carlsberg has lost 9 per cent of its market value. Britvic has also suspended its buyback programme in light of the approaches.
A deal would help Carlsberg scale up in the UK market through soft drinks. Carlsberg is the fourth-biggest brewer in Britain, where it operates a joint venture with Marston’s (MARS), but is firmly behind listed competitors Heineken (NL:HEIO) and Anheuser-Busch InBev (BE:ABI) in beer market share terms. It also has a significant soft drinks portfolio, though, with around a third of its volumes in Western Europe being non-beer products according to HSBC. Carlsberg said a deal would give it access to “appealing long-term growth opportunities” in soft drinks.
Both companies are PepsiCo (US:PEP) bottlers, Britvic in the UK and Carlsberg in five countries including Sweden and Norway. Britvic signed a 20-year franchise bottling agreement with PepsiCo in 2020, through which it produces and distributes products such as Pepsi Max, 7UP and Lipton ice tea.
A barrier to a deal has been removed after PepsiCo said it would “waive the change of control clause” in its Britvic bottling agreement. PepsiCo technically had the option to terminate the agreement, a course of action that would have made Britvic a significantly less attractive takeover target.
Yet HSBC analysts conclude that a significant soft drink volume boost for Carlsberg “doesn’t justify such a major [acquisition] move”. The deal could deliver a return on invested capital (ROIC) of 7.5 per cent in 2028, on the basis that synergies come in at roughly 6 per cent of sales, according to the bank. That return is in line with Carlsberg’s weighted average cost of capital.
Over at RBC Capital Markets, analysts James Edwardes Jones and Emma Letheren think a deal at a price of 1,350p to 1,400p would give Carlsberg “pro-forma EPS enhancement in the high teens” and a ROIC of around 8 per cent. They were “bemused” by the acquisition attempt, dubious about cultural synergies and why Carlsberg wants to double down in the “notoriously unprofitable” UK beer market.
Carlsberg plans to fund a successful cash offer with debt. This would push up its leverage to around three times cash profits, well above management’s target range of under two times. Management is also trying to finalise the buyout of minority shareholders in its Indian subsidiary, which would increase leverage further.
There is uncertainty about the level of any further bid and its impact on shareholder value. Carlsberg’s second offer valued Britvic at an enterprise value of £3.96bn (13.1 times adjusted cash profits over the past 12 months). In share price terms, it was a premium of 29 per cent to the closing price on the day before rumours about a deal emerged. The fall in Carlsberg’s share price and analyst reaction arguably make it less certain that the brewer will come back to the table with a higher offer.
New Carlsberg chief executive Jacob Aarup-Andersen set out an improved organic growth outlook for the company in February, when he raised the long-term compound organic annual growth rate target to 4-6 per cent from 3-5 per cent. He noted at that point that part of the refreshed strategy was to grow the company’s ‘beyond beer’ category, which contributes 2 per cent of total volumes, including “through partnerships and local brand extensions”.
Under stock market rules, Carlsberg has until 19 July to make a firm offer or walk away. Britvic has had a good year, with analysts raising EPS forecasts by 10 per cent, but Aarup-Andersen has a big job on his hands to convince the market that a takeover makes both strategic and financial sense. Given the Carlsberg Foundation holds three-quarters of the votes at the company, other investors will simply have to deal with an acquisition if one is agreed.
RBC warned that if an acquisition does complete it could ultimately be another example of a consumer staples business chasing after “expensive growth in preference to the more boring job of executing efficiently and letting equity markets do their job of recycling excess capital from mature, cash generative businesses to expanding, cash consuming ones”.
