Analysis - AG Barr move for Lucozade, Ribena looks good, but risks remain
GlaxoSmithKline will sell Lucozade and Ribena before the end of this year
A move for Lucozade would open up export markets for AG Barr, but the structure of any deal to buy the brand is crucial, an analyst has warned.
A report in The Sunday Times in the UK yesterday (14 July) claimed that Barr is in discussions with several private equity companies over a possible bid for GlaxoSmithKline's (GSK) Lucozade and Ribena brands, after GSK put them up for sale earlier this year. Barr saw its proposed merger with Britvic collapse last week, when Britvic turned down an improved offer from the company.
In a note to clients today, Damian McNeela, an analyst at Panmure Gordon & Co, said that he could see Barr's reasoning for starting talks with potential private equity partners.
“The implied valuation range of GBP1bn (US$1.51bn) to GBP1.2bn for these brands would suggest that it makes sense for AG Barr to team up with PE (private equity),” said McNeela. “This could be the catalyst for us to become more positive on the shares. However, the deal structure will be crucial in determining the merits for equity investors.
“The most likely (deal), in our view, would see the acquired brands placed into a JV with PE," he continued. "In this scenario, AG Barr could take out a call option to buy PE out at some point in the future. Secondly, PE could take a stake in Barr injecting the required equity into Barr for them to bid with.”
McNeela was broadly positive on any possible acquisition. “We think that these brands would broaden Barr’s portfolio and, via Lucozade, the opportunity to access export markets,” he added.
The analyst calculated the valuation of the GSK brands based on their combined annual sales of around GBP600m and an industry average EBITDA margin of around 16% on the brands' EBITDA of GBP96m. “A Price/EBITDA multiple range of 10x to 12x computes our range of GBP1bn to GBP1.2bn,” McNeela said.
The sales process for the two brands in underway, a spokesperson for GSK told just-drinks today, and is expected to conclude by the end of this year.
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