Four years after a so-far fruitless mega-merger with Marston’s, Carlsberg has decided the glass is only half full in Britain and submitted a bold £3.1 billion bid for soft drinks maker Britvic.
At first glance it seems like a strange match. Brewers and soft drink companies don’t often go hand in hand – in recent history and at least in this country. And Britvic’s brand portfolio, which includes Robinsons squash, Tango and R White’s lemonade, doesn’t exactly fit comfortably alongside brands like San Miguel and Tuborg in Carlsberg’s roster.
So what exactly does Carlsberg hope a move for Britvic will bring? And which party benefits the most from it?
Can Carlsberg add scale through Britvic purchasing?
A report assessing Carlsberg’s performance in Britain in recent years could say there is ‘room for improvement’.
Since the acquisition of Marston’s in 2020, it has occupied fourth place in the brewery rankings, with approximately 10% of the market. The joint venture Carlsberg Marston’s Brewing Co (CMBC) produces three of the UK’s top 100 alcohol brands: San Miguel, Kronenbourg and Carlsberg.
But “it’s probably fair to say that their flagship brands have come to a bit of a standstill,” said Rabobank analyst Francois Sonneville. He points to Madrí and Cruzcampo, propositions brought to market by competitors Molson Coors and Heineken, and says that CMBC – apart from the recently revamped 1664 Bière – has not been as successful in producing “new products for a changing consumer”.
As British consumers avoid booze or moderate their alcohol intake, major brewers have increasingly turned to non-alcoholic propositions to protect their position.
CMBC’s moves in this segment have been mixed so far. Brooklyn Special Effects raised £2.5m last year (NIQ 52 w/e April 24, 2023), but Carlsberg 0.0 – relaunched for a third time last year – has still only generated sales of just under £400,000.
That’s why a switch to soft drinks feels “more like a defensive move” than an offensive move, Sonneville says.
Carlsberg’s ‘beyond beer’ ambitions
Carlsberg has not shied away from its ambitions to go beyond beer, which currently accounts for just 2% of its total volume worldwide. Sonneville says the brewer will have noted the successes of Danish brewer Royal Unibrew, which now makes more than 50% of its sales from non-beer products, and Molson Coors in the US, when considering diversification.
“It’s only been just over 15 years since C&C Group sold its soft drinks business to Britvic, but times have changed and it’s important for brewers to look at all the assets they have and use them in the most efficient way. ” he says.
Carlsberg has “already dipped its toe in the water” by launching soft drinks such as Tuborg Squash Light and Xixia Pineapple & C in Denmark and China, AJ Bell investment director Russ Mold explains.
However, a move by Britvic – number two in British soft drinks behind Coca Cola Europacific Partners (CCEP) – would “boost its position in this sector”, says Mold.
“Carlsberg appears to have taken the position that it needs to diversify to protect its future and Britvic looked like a ripe opportunity, potentially at a reasonable price,” he added.
Is Britvic a good target for Carlsberg?
Britvic is performing solidly in a soft drinks category under pressure, hit by inflation and falling consumer prices. Mold describes Britvic as “a classic example of a company that quietly got on with its work.” Sales for the six months ended March 31 rose 11% to £880 million. Interim profit before tax, meanwhile, rose 10% to £60m.
While the brands may not have the star power that CCEP boasts, there is plenty to pique Carlsberg’s interest, not least the license to produce and sell the PepsiCo portfolio of brands in Britain and Ireland.
These brands – including Pepsi, 7up and Mountain Dew – are well known at Carlsberg, which bottles for PepsiCo in Norway, Sweden and Switzerland. PepsiCo has already given the green light, signaling its willingness to waive the change of control clause in the bottling agreements it has with Britvic should a deal materialize.
Britvic also has an eye for emerging consumer trends. Through incubation and acquisition, it has built a portfolio of challenger brands that resonate with younger consumers. Revenues in the new growth spaces division, which includes healthy drinks brand Plenish, adult soft drink London Essence Co and Jimmy’s Iced Coffee, rose 63.5% in the six months to March 31, according to its interim results.
Does Britvic want to sell?
Britvic has so far taken a dim view of Carlsberg’s approach, rejecting two offers in quick succession before issuing a stock market announcement decrying the deal, which it said “significantly undervalues Britvic and its current and future prospects”. Carlsberg now has until July 19 to make a third offer.
The brewer’s two offers – the first at £12 per share and the second at £12.50 per share – represented premiums of 23% and 29% above London-listed Britvic’s trading price before June 21.
The second offer was “at a reasonable price,” with a share valuation of 13.1 times Britvic’s 2023 EBITDA, according to Bernstein analysts Trevor Sterling, Nadine Sarwat, Adrien Rabier and Matthew Cheung. They note that there would be “some operational synergies” between CMBC and Britvic, as well as between Britvic and Carlsberg’s Kronenbourg beer operations in France.
What does Carlsberg get for its money?
Founded in the 1930s as The British Vitamin Products Company, Britvic has grown into a major multinational soft drinks manufacturer, headquartered in Hemel Hempstead and listed on the London Stock Exchange.
To notice: The company has the UK license to make and sell PepsiCo products in the UK and Ireland, including Pepsi, 7up, Lipton Ice Tea and Rockstar Energy. Its own brands include Britvic, Tango, Robinsons, J20, Purdey’s, Plenish and Jimmy’s Iced Coffee.
Gain: Grown by 6.6% to £1.75 billion in 2023
Market presence: Great Britain accounts for 71% of sales, while Brazil contributes 12%. Other markets including France, US, Benelux, Asia and the Middle East make up the remaining 17%
Factories: Britvic has three major factories in Great Britain, in Rugby, London and Leeds. In international markets it collaborates with third parties for production and distribution.
There is also “quite a bit of overhead associated with being a separate publicly traded company,” Sterling adds. “You have a chairman, a well-paid CEO and all the legal infrastructure needed to operate a plc.”
Analysts at Barclays are still more optimistic about the deal. They note that there is “significant opportunity for synergies, namely as Britvic moves from third-party distributors to Carlsberg’s platform,” with distribution costs currently accounting for 11% to 12% of the soft drink maker’s revenues.
Who benefits most from a merger?
But risks remain. For Britvic, the possibility exists that merging with the world’s third-largest brewer, and one with relatively limited expertise in soft drinks, could do more harm than good.
“Their big fear will be that this is an impulsive event for Carlsberg and that there will be no follow-up,” says Sonneville. He notes that Britvic is “progressing well” in Britain, Ireland, France and Brazil, but there is no guarantee that Carlsberg will be successful in scaling its own brands into other markets.
“There are good products in Britvic’s portfolio, but they are products that are very well known in Great Britain. Soft drink markets are, with a few exceptions, quite local, so it’s almost like building a brand from scratch.”
Stirling agrees. He says the biggest risk “is around the sustainability of Britvic’s commercial performance”.
“They’ve done a good job of growing faster than their underlying markets, but that’s always a tough trick to replicate,” he says. “It is much easier to operate in markets where a lot of structural growth is embedded.”
For Carlsberg, the 2008 takeover of Scottish & Newcastle, which saw Heineken and Heineken pay £7.8 billion for the British multinational brewer, is a reminder of the risks of such large-scale mergers and acquisitions.
The Danish company not only overpaid for its stake, it also gained full control of Baltika Breweries, but had to give up ownership of the company after Russia’s invasion of Ukraine in 2022.
Carlsberg shareholders will have to “bear the brunt” of any unforeseen issues that hit Britvic in the future, Sterling says. He notes that the group’s share price – down 8.3% since last week – indicates that “shareholders are very concerned that a deal will be struck at a significantly higher price”.
What happens now?
Andrew Ford, analyst at Peel Hunt, says Britvic holds most of the cards should it decide to come to the negotiating table.
Britvic CEO “Simon Litherland is quite an ambitious man,” he says. “He believes the company can be much bigger than it is now, especially internationally. You only have to look at their recent acquisitions to see the ambition.
“Obviously if the offer was €14 plus (per share) you would get quite a bit of pressure from the shareholders, but from the management side I think they are ambitious and genuinely believe in the growth potential. at the company.”
Ford believes that, despite rising almost 25% on news of the offer, the fact that Britvic’s share price remains below the £12.50 offered by Carlsberg suggests a deal remains in doubt.
“It doesn’t feel like there is much more juice in the tank for Carlsberg, especially with the dissatisfaction shown by their own shareholders,” he says. “On the other hand, if there are other people in the market who are interested in Britvic at all, they will have to put an offer on the table. The obvious name that comes to mind is Suntory.
“If you were ever interested in Britvic, now is the time to make an offer or shut up.”
