In the Spotlight – Cott Corp's Cliffstar takeover
Cott's takeover has been lauded by analysts as a bold move
The US$500m deal, announced yesterday (8 July), will combine the number one private-label carbonated soft drink firm with the number one private-label juice manufacturer.
The takeover has been lauded by analysts as a bold move that allows Cott the potential to grow rather than continue to fight out an increasingly tough battle for declining carbonated soft drink (CSD) share.
Cott's CEO, Jerry Fowden, told analysts the combination will be good for both firms.
“We see Cliffstar as an ideal strategic partner and we expect the deal to improve our position in private label over the coming years,” Fowden said. “I believe longer term there will be what I call cross-scale and up-scale opportunities for some of their products to go into stores that we use and vice versa.
“From smoothies to enhanced waters, we will together remain focused on private label and create product quality for our customers,” he added.
Stifel Nicolaus analyst Mark Swartzberg considers the proposed Cliffstar transaction a major event in the history of Cott and a strategic positive.
“In our view, it diversifies Cott’s cash flows into a more stable category than CSDs while also providing today’s Cott and today’s Cliffstar with the opportunity for meaningful cost synergies and revenue synergies,” the analysts noted.
As well as the $500m, Cott will pay $14m to Cliffstar in deferred consideration over a three-year period, while also offering the company an "additional contingent earnout consideration" of up to $55m, dependent on its performance up to the end of this year.
Cott subsequently expects a cash tax benefit from the transaction in the region of $75m.
The deal price, according to Swartzberg, is around 69% of Cott’s current enterprise value.
Indeed, selling soft drinks into Cliffstar accounts not yet penetrated by Cott and vice versa, is no doubt a win-win situation for both firms.
UBS analyst Kaumil Gajrawala believes the acquisition is a "positive long-term move" by Cott, as it lessens its dependence on soft drinks. But, he also said investors could be concerned about the additional debt Cott is taking on to fund the deal.
However, he noted that private-label juice offers a better opportunity than soft drinks, as 70% of the CSD market in North America is controlled by two companies, whereas 70% of the juice market is controlled by about a dozen companies - a situation Cott could use to its advantage to gain share in the juice category.
CIBC World Markets analyst Perry Caicco called the deal a "transformational move for Cott", reducing its reliance on Wal-Mart and its exposure to the impact of Coca-Cola and Pepsi, but noted that one difficulty will be to design a growth strategy.
"Cliffstar's growth had stalled and its category is stagnant; Cott's core business has modest growth prospects in a flat industry," Caicco said.
But, he added that “Cliffstar’s position in that category is strong and its competitors are fragmented".
The deal also signals that Cott’s management team knew a shake-up was needed to restore the company’s share price, which has fallen about 40% since last autumn, in part because the saturated soft drinks market, which offers little room for growth.
Around 61% of Cott’s sales come from CSDs. After adding Cliffstar into the mix, soft drinks will comprise 43% of sales and 36% will come from juices. Meanwhile, expenses are estimated to fall by about $20m a year.
Taking Cliffstar’s expertise on board will allow Cott, a company with combined revenue of $2.3bn, to grow both its product offerings and company operations, according to J. Ross Colbert, managing director for Zenith International. “I think this is a great strategic deal for both companies,” he said. “This [move] gives Cott a broader platform of products to offer retailers.”
Colbert cites Cliffstar’s hot-fill capabilities as a significant way in which Cott can expand its offerings. By adding hot-filled products, Cott will have a better shot at increasing its in-demand items like functional beverages, which are estimated to represent 7% of the company’s output.
Increasing bottom-line product sales is a bold decision that helps position Cott – which had foundered in recent years, replacing its CEO and taking a beating in the stock market – in a way that it can grow in new channels and add customers, according to Marion Glover, president and CEO of Glover Capital.
“[The acquisition] gives them the ability to talk to customers with a bigger selection of products,” he said.
Regardless of the overall market, Colbert believes that Cott’s “compelling synergy" with Cliffstar will benefit retailers who will be able to deal with fewer suppliers. In the end, Cott will become a “much more balanced company", according to Colbert.
The second round-up in our Review of the Year series sees Ben Cooper consider a busy 12 months for our soft drink brethren....
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