Comment - Britvic, AG Barr Merger would Forge New Strengths
The merger can work for AG Barr and Britvic
“Made in Scotland from girders,” was the old tagline for the Irn Bru CSD. And in the past few years, Irn-Bru owners AG Barr have proved to be made of sterner stuff than its potential merger partner Britvic.
Both have suffered this year from bad weather in their core UK markets. Britvic's Q3 results were described by an analyst as “broadly miserable” on their way to a 5% revenue drop (7% in the UK) and AG Barr warned that H1 results, due to be announced later this month, will be lower than last year.
However, it wasn't AG Barr that shot itself in the foot with a ludicrous product recall sparked by a faulty cap that almost choked a child. Britvic compounded its dangerous error with mixed messages over how much the recall will affect its bottom line, initially saying costs would reach at most GBP5m (US$7.8m) before revising it to five times that.
There were problems for Britvic before the recall: earlier this year, its share price was only marginally higher than in 2005 when it went public, and analysts said the company was having trouble converting profits into cash. According to the market, Britvic's brands have been underperforming for the past three years due to sclerotic management.
All of this has left the company exposed to a takeover, with suitors attracted by brands with a lot of potential, if only they were handled correctly. Diageo is rumoured to be interested, as is private equity firm Permira. Japanese brewers such as Suntory or Asahi may also be on alert as they continue to look outside their domestic markets for growth in soft drinks.
Instead, it seems Britvic will throw its lot in with AG Barr. The talks announced today (5 September) are only at a preliminary stage, but it is likely to go ahead. Britvic's shareholders would own 63% of the combined group, with AG Barr's taking the rest.
The move makes sense for both groups and needs to go ahead, not least because it would safeguard both firms from takeovers in a market that didn't get the memo on how the golden age of M&A is over.
Importantly, Britvic will gain a steady hand on the tiller, with AG Barr CEO Roger White in line to helm the new entity. Under his guidance, Barr has emerged with a strong business model, and as the only vertically-integrated soft drinks firm in the UK. It operates solely as brand owner - unlike Britvic, which makes about 40% of its sales from PepsiCo products – and recently only brand owners have found profit in the UK market. In July, Vimto-owner Nichols posted a 14% rise in H1 profits.
In return, Barr will look to follow Britvic into the US, where Britvic has set up a franchise model for concentrate that one analyst said could “fundamentally re-base the value of the company”.
Barr has a strong foothold in Eastern Europe, demonstrated by a recent attempt to pinch its Irn Bru trademarks, but no presence in North America outside of a few British ex-pat grocery stores.
As a company that makes its drinks out of girders, and seemingly its executives too, you can bet AG Barr would love to test its mettle there.
To see just-drinks' full coverage of AG Barr and Britvic's proposed merger, click here.
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