M&A Watch - The Time is Right for Refresco Gerber Shareholders to Exit

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While unlikely to slip under the net before the year is out, Stefan Kirk from M&A practitioner Glenboden believes Refresco Gerber's shareholders will spend Christmas and New Year mulling a sale of the European soft drinks bottler.

Will shareholders call time on Refresco Gerber?

Will shareholders call time on Refresco Gerber?

Last month, Refresco Gerber announced that it is 'exploring capital structure alternatives', and that it has hired J.P. Morgan as advisors for that. In the M&A world, such language is often code for 'trying to find a buyer'. Now, in December, we hear a rumour that Blackstone is lining up a GBP1.5bn (US$2.4bn) bid for the group.

Could it be that Refresco's shareholders see an opportunity to exit the business, on the back of a strong post-merger performance?

Positive financial profile ...

It appears that the two-year post-merger integration programme at Refresco, following the acquisition of Gerber Emig in November 2013, is well on track, with management citing synergies from the integration as the main factor behind a strong performance, especially in operating profit and cash flow, in 2014.

A picture emerges, then, of a group with high mid-term sales growth potential; plus an EBITDA margin of around 10%, which is quite high for a private-label bottling business.

Even Refresco's historically-high net debt, the product of an aggressive strategy of growth through acquisitions extending back over a decade, is now below 4x EBITDA. This appears to have been reduced further in 2014, mostly through the EUR75m repayment of a revolving credit facility in Q3.

... plus strategic strengths ...

Following the acquisition of Gerber Emig, Refresco has the profile of a strategically well-positioned and balanced business. For a start, Refresco is now the clear leader in Europe in soft drinks and fruit juice bottling for retail and branded customers.

Geographically, sales are well spread across Europe, especially the largest markets, with Germany, BeNeLux, the UK and France each accounting for roughly 20% of group sales. In terms of sales by product, the division between fruit juice, CSDs and water is also quite well balanced.

On channel mix, the general market in Europe is under constant margin pressure thanks to the growth of hard discounters at the expense of traditional retailers. However, Refresco, thanks to its scale, is best-placed to benefit from this trend.

... whilst leaving upside for new owner ...

At the same time, there are still goodies in store for a potential new owner of Refresco, in terms of value enhancement through further restructuring, acquisitions and organic growth.

The group is currently implementing a restructuring plan that includes factory sales and other efficiency measures in Germany and the UK. However, with a total of 26 manufacturing facilities spread across Europe, there's still room for more - private-label logistics reportedly dictate that a single factory can efficiently serve customers in up to a 300km radius.

On the acquisition front, the European bottling industry is still very fragmented, especially in the CEE region where Refresco's presence is relatively small. Plus the group has organic growth upside, in areas like RTD tea and energy drinks, and in increasing the proportion of contract manufacture for brand producers (currently under 20% of total sales).

... all justifying a high valuation ...

Generally, valuations are welling upwards in food & beverage M&A, we believe, as a result of a ten-year financing cycle that begins around the middle of each decade. Look no further than the 20x EBITDA or more that Suntory Holdings paid for Beam Inc earlier this year.

Of course, valuation multiples for private label bottlers, like Refresco, are far lower than those for branded players like Beam. However, Refresco now, more than ever, can command a significant premium to reflect its scale. In a fast-consolidating retail environment in Europe, only the largest bottlers will keep up with the three-to-five retail groups that will be left standing by 2020.

Put into hard numbers, we can estimate that, while Refresco pays up to 8x EBITDA for small, independent bottlers around Europe, the scale premium that its own equity can command should be at least 50% above that, which translates into an EBITDA multiple of 12x.

... and encouraging a 'capital structure alternative'

According to industry speculation, there are two large private equity firms preparing a bid for Refresco, namely Blackstone and KKR. Certainly, in the case of KKR, that makes sense, after the company's failed bid for Treasury Wine Estates a few months ago; KKR must be itching to get the same money out of the door and into another beverages business.

Post-merger, Refresco Gerber's shareholder base comprises 72.5% held by Refresco shareholders (an Icelandic consortium, private equity firm 3i and management), and 27.5% held by Gerber Emig's shareholders (Hanover Acceptances). It seems that the Icelanders are the largest single shareholder.

3i reinvested in Refresco in March 2010 for a 20% stake, so the private equity firm is likely to be interested in a five-year exit horizon. The Icelandic consortium has been there since before the 2008 financial crash, exceptionally holding onto its shares while selling off most of its other assets in the crash; so they are long over-due for an exit.

As for the family-owners from Gerber, maybe they'll just agree to tag along, or stay put.

Refresco Gerber by numbers

  • Net sales, year to end of September: EUR1.95bn
  • Sales CAGR 2009 to 2014: 12%
  • EBITDA, year to end of September: EUR190m
  • Margin: 9.7%
  • Net debt to end of 2013: EUR723m
  • Debt ratio: 3.8x

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