Comment - Soft Drinks & Water - AG Barr Jilted at Britvic's Altar, But What Now?
Although AG Barr was on its way to the church earlier this month, Britvic was still having second thoughts. The end of the affair leads Richard Corbett to ponder what went wrong for the two and what happens next.
It was a very short romance before the wedding was announced but we always suspected that the attraction was one-sided and, for one of the parties, the wedlock was more out of necessity than desire.
The Fruit Shoot recall in the UK last year had cost Britvic millions and brought the company to the brink of the altar as they desperately sought to get their sums to add up. No sooner had the church been booked, than the UK Office of Fair Trading decided that the country's Competition Commission should investigate whether there could be any lawful impediment as to why the union could not take place. Eight months later, the marriage is off and Barr Britvic Soft Drinks is a non-starter.
Back in February, the irked response by Britvic's chairman, Gerald Corbett, to the OFT's referral suggests that Britvic really did want - maybe even need - the merger to take place.
The decision to refer the merger undoubtedly raised eyebrows and did not just catch Corbett by surprise. The investigation found that "the acquisition raised competition concerns with respect to the loss of the competitive constraint from some of Britvic's brands on Barr's IRN BRU and Orangina brands".
The argument that the merger could lead to higher prices was pretty shallow because, if Orangina and Tango prices increase, then it is pretty likely that consumers will simply switch to Fanta. The merger would undoubtedly have changed the soft drinks trading landscape in the UK but, in terms of brands, Barr Britvic would still only account for around a quarter of the market, according to research agency Canadean.
That’s only marginally more than Coca-Cola Enterprises.
Since the decision to delay the merger, Britvic have not exactly been acting like a company that is waiting around for an all-clear to merge and it was very much business as usual. A new cost-savings plan was implemented, with the closure of three sites and a third of the savings being channelled into international operations. Moves to take the Fruit Shoot brand to the US, India and Spain were also announced. In the US, a distribution deal with PepsiCo has seen Fruit Shoot (we assume without the anti-spill cap) launched into convenience stores and garage forecourts in 30 states. That's quite a mouth-watering opportunity, and probably contributed to Britvic’s decision to abandon the merger talks. How ironic that the brand that triggered the merger may well have played a part in preventing it.
A jump in profits in its fiscal half-year will also have been influential. It should also be taken into account that the merged entitiy would have been run by a Barr man, which will have been quite an incentive for Britvic to use the delay to address their issues and to try to change the goal posts.
Britvic’s changed circumstances meant that AG Barr had to table a considerably better offer if the deal was to come off: This was always going to be difficult. The new offer was not that much of an improvement and although we do not know whether this may have just been a starting point for negotiations, I doubt it came as a surprise to Barr that Britvic wanted to maintain its independence.
This does not mean, however, that Britvic will remain a stand-alone company forever. Somebody like Suntory may well see Britvic as a very attractive proposition but it is now unlikely to be a distress sale. In the five months since the onset of the Competition Commission's report, Britvic has successfully won back control of its own destiny.
AG Barr, meanwhile, looks to be turning its attention to GSK’s Ribena and Lucozade brands. There is a very limited overlap with their existing portfolio, and the brands' premium pricepoints make the margins very alluring.
A purchase would give them a sizeable presence in Ireland, which must be exciting for AG Barr. Developing the brands overseas in other markets will also be appealing – Lucozade and Ribena are present in a number of markets including China. The longer-term ambitions for AG Barr will be to continue to grow into more of a national and less of a regional player. The Britvic deal would have been a short cut to achieving this. Ribena and Lucozade are very much national brands and would make up for missing out on Britvic, to an extent.
There are a lot of pluses but there are some negatives: GSK has done brilliantly at squeezing the potential out of these two brands in the UK for a number of decades, but achieving future domestic growth will be increasingly difficult. Also, the marketing costs associated with maintaining these two brands’ premium status in the UK will be considerable.
Indeed, these factors may well be behind GSK’s decision to offload the two brands.
Of course, making predictions about what will happen next is never easy, but the one thing that the Barr Britvic merger that never was has shown us, is that we should always expect the unexpected.
The marketplace is always throwing up surprises.
For just-drinks' full coverage of the AG Barr Britvic merger, click here.
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