Comment - Britvic Needs a Merger, not a Gamble

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What a difference four months makes for Britvic chairman Gerald Corbett.


In February, he was bemoaning the UK Competition Commission's derailing of the all-but-sealed AG Barr merger, telling the Financial Times: “The winners today are cracking open bottles of Champagne in Atlanta, Georgia.”

Jump to Tuesday this week, when the commission cleared the deal, and Corbett, far from celebrating, has a change of mind. “Our company is in a different place to last summer when the terms of the merger were agreed,” he said.

So Corbett gets what he wants, but then decides he doesn't want it any more. Just what exactly is going on here?

According to Vasu Majumdar, a beverage specialist at Grant Thornton UK, it is one of two things, both of which stem from Britvic's restructuring plan, announced alongside the company's H1 results last month. CEO Simon Litherland, who has only been in the post a few months, unveiled cost savings worth GBP30m (US$45.6m) a year, including the closure of three UK facilities with the loss of up to 400 jobs.

“If I was the chairman of Britivic and the chief executive is telling me, give me a chance, I will sort out this business, why get into a deal that has got so many hurdles to clear?” Majumdar told just-drinks.

“Another reason could be that the chairman is playing his card to negotiate the merger again, putting pressure on the AG Barr board to come back and sweeten the deal.”

Either way, it is a dangerous gambit as it risks scuttling a deal that Britvic needs (though Majumdar is more sanguine, saying “that's mergers and acquisitions for you”).

Any brief overview of the soft drinks industry should make unsettling reading for Corbett - PepsiCo is rumoured to be interested in SodaStream (denied by PepsiCo), GlaxoSmithKline is selling Lucozade and Ribena and Coca-Cola Enterprises is warning of the UK's “dynamic competitive environment”. In short, the market is consolidating and Britvic and Barr will need each other or risk being swallowed up themselves, perhaps by an acquisition-keen Suntory

After all, the arguments in favour of the merger were not just about efficiency savings of the type Britvic are now undertaking. A Barr Britvic Soft Drinks entity would take an estimated 13-14% share of the UK market, according to Cannacord Genuity, and offer more muscle to grab a seat at the table when the consolidation stops.

So what does this say about those in charge of Britvic?

It is no secret that the City prefers AG Barr's executive team, which is why Barr CEO Roger White, and not Litherland, will take the helm of a merged company despite his firm's junior share. I understand that there is also some concern among analysts that instead of a fresh start in the wake of former CEO Paul Moody's departure, Britvic appointed Litherland, who is tainted by the fact he was around for the Fruit Shoot recall débâcle that cost the company about GBP25m.

Then there was last month's H1 results, which on the face of it delivered strong profits growth in a challenging half for a UK industry hit by cold weather. 

However, analyst Wayne Brown at Canaccord Genuity noted that first-half volumes were down in every category, while others saw a Q2 volumes fall of about 9%. “Surely this is unsustainable ... raising the question whether this strong H1 performance is being driven by short term dynamics,” Brown said.

If the merger goes ahead, Barr's executive team has a job on its hands.

To see just-drinks' full coverage of AG Barr and Britvic's proposed merger, click here.

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