While no one expects Bulmer's to become the Enron of the drinks world, a series of financial blunders have left the company's share price in tatters and already caused its CEO to resign. As Chris Brook-Carter reports, things are liable to get worse, although the company's position as a takeover prospect offers a ray of light.

There are probably a number of Bulmer's investors who would rather have seen its CEO, Mike Hughes, throw himself onto one of the arrows from the company's Strongbow advertising, rather than walk away with a six figure severance package after resigning last week.

His resignation came after a further week of turmoil at Bulmer that has seen its stock enter into freefall. Just over a week ago, Hughes had put his name to a strange press release that revealed that the company had discovered £3.3m in "previously unidentified promotional costs".

Within days, the crisis had escalated when the Bulmer board adjourned its annual meeting, cancelled its dividend and revealed that Hughes had left the company, apparently of his own will.

Although £3.3m is no earth shattering amount for a company that turns in sales of £584.9m a year, in the present climate of market uncertainty and distrust, combined with the events that followed days later, it was enough to send the share price of the company spiralling down.

On the 8th July, when the company reported a fall of more than £7m in pre-tax profits to £21.1m, the share price hit a 12-month low of 307.5 pence. On Monday 9th, the company's share price had it had plunged to 234p. By Wednesday 11th, a new 12-month low had been achieved with the share price plummeting to 205p.

Worse news followed at the beginning of this week, after it emerged that the company is facing a pension fund deficit of £29m. The latest annual report showed the value of the assets in the scheme was £73.3m, with the liabilities totalling £102.4m, leaving a shortfall of £29.1m. It also showed that £54.4m of the total assets in the pension schemes was in equities. As the FTSE All-share index has declined by some 20% since the year end, the deficit could have increased by a further £10.9m to more than £40m.

Farcically, in view of all that has followed, Hughes had said on Monday 9th when he disclosed the news of the missing £3.3m that, "it is immensely irritating and indeed concerning that there's another piece of bad news from Bulmer's. Hopefully it will be the last bad news item." Given the situation the company has found itself in and the pessimistic outlook from analysts, this seemed an extremely vain hope. Further bad news was almost certain to follow and may continue to do so.


"Unfortunately, given the company's gearing position, its weak internationalisation and the weakening of its UK cash-cow, there could only ever be further bad news"
Unfortunately, given the company's gearing position (172%), its weak internationalisation and the weakening of its UK cash-cow through diversification into wholesaling, there could only ever be further bad news," said a research note from equity analysts WestLB Panmure.

Some analysts even believe the 2003 dividend is in doubt. "We now believe that there must be significant doubts about the 2003 dividend and expect further restructuring/exceptional costs to come," said WestLB.

The problems at Bulmer have been running deep for sometime now. What has concerned analysts and investors alike is not necessarily the scale of the 'missing' £3.3m but that its circumstances hint at a mismanagement that mirrors another event just over four years ago. On that occasion a Christmas promotion adversely affected profits because of a cost over-run, when supermarkets were selling 12-can packs of Strongbow at £4.99 rather than the normal £8.99.

"Though the blame for the £3.3m charge has been attributed to 'administrative indiscipline' of the previous head of Bulmer's on-trade division," said WestLB, "

"We believe that the situation is symptomatic of the lack of an appropriate organisational structure per se"
we believe that the situation is symptomatic of the lack of an appropriate organisational structure per se."

These management issues are all the more concerning when placed in the broader picture of the cider market itself, which has seen its UK value suffering badly due to the battle between Bulmer and rival Mathew Clarke, which owns Blackthorn. With the continued competition from RTD products, the cider market has become increasingly unstable.

In response to this Bulmer has in recent years attempted to alleviate its reliance on the UK by expanding its overseas operations. But this in itself has come under criticism from some analysts who argue that most overseas cider markets are even more niche than the UK, with established competitors.

Analysts are suggesting that the company may be valued at only £110m, or only 10 weeks' sales and WestLB has a target price of only 153p for Bulmer's stock. All in all, bad news for investors. However, it does mean that the company is ideally placed as a takeover target, only one of a few realistic ways a turnaround in performance can be achieved.

Expert Analysis

The Market for Alcoholic Drinks in the UK

This comprehensive report supplies essential sales data for 1997-2001 in addition to forecasts to 2006. Includes analysis of new product developments; on-trade vs. off-trade sales; contraband and parallel trade as well as providing company and brand share data and market size statistics. 

For all last week's worries, Bulmer is still strongly positioned in the UK and would make an ideal bolt-on acquisition for one of the big brewers without a significant presence in the market, such as Anheuser-Busch, SABMiller or Heineken. On the other hand, the Bulmer family still controls 41% of the stock and while it may me more tempted to sell now than at any time before, after losing its dividend, family shareholders are notoriously difficult to second guess.

Some sort of alliance therefore with a global or regional brewer may be more likely. But, with all the other pickings on offer globally, Bulmer may be low on the list of priorities for the likes of A-B.

So perhaps the Bulmer family will call last orders on the all the pressures of the public market place and take this opportunity the low share price has afforded to take the group private again.

Whatever the medium term outcome, expect more upheaval before the current crisis comes to a conclusion and more potential casualties for the Strongbow arrows.