Having rejected the recent takeover bid by Coca-Cola Amatil, Australia’s leading home and office water company, Neverfail Springwater, is actively seeking counter-bids. There are no shortage of potential bidders but none has yet emerged. As Chris Brook-Carter reports Neverfail shareholders could be taking a substantial risk by holding out for a better offer.
An intriguing game of brinkmanship is developing between two of Australia’s top soft drinks companies, Coca-Cola Amatil (CCA), the Coke bottler and the country’s market leader in carbonates, and Neverfail Springwater, the largest supplier in the home and office bottled water (HOD) market.
It is over a week now since Coca-Cola Amatil boss, Terry Davis, announced that the company was launching a A$2.25-a-share bid for Neverfail, having already snared a 14.99% stake in the company. But it became clear almost immediately that the bid was viewed as hostile by the board at Neverfail, which even before meeting officially had labelled it “inadequate”.
Sure enough, after an official meeting at Neverfail on Friday the board “confirmed its preliminary views that the CCA offer is inadequate and undervalues the company.”
Interestingly, it went on to announce that it had “resolved to develop an approach to this situation which will seek to maximise value for shareholders. To this end the board will pursue all options, which may involve the active solicitation of rival bids for the company.” In other words, it would do all it could to actively promote a bidding war to scupper Amatil’s plans.
To date, it is believed that both Nestle and Danone have made contact with Neverfail, though no formal bid has been made by either. On top of this, the Neverfail board will surely approach a number of companies that have shown an interest in the business in the past or who might be interested in the future. These include rival water companies such as Watsons Water and Suntory Water.
For its part, CC Amatil has kept its cards close to its chest, refusing to say whether it would consider upping its bid price, while assuring the market that A$2.25 a share, which values Neverfail at A$215m, is a “full and fair” bid.
Certainly the bid was a seemingly generous 22% premium on the Neverfail share price on the day of the offer. And, as CCA sets out in its offer letter to Neverfail investors, it also represents a multiple of 22.4 times Neverfail’s reported earnings per share, which CCA describes as an “attractive premium”.
Unsurprisingly though, CCA’s literature does not tell the whole story. Since the bid Neverfail’s share price has taken off, closing last week at A$2.50 and giving the company a value of A$237m, suggesting that the market itself is siding with the Neverfail board. “The market is telling you they’re not going to get it at A$2.25,” one analyst said last week.
The bid does offer an attractive premium on Neverfail’s recent share history, but it looks decidedly less generous in a longer-term context.
Neverfail itself has labelled CCA’s bid “opportunistic”, claiming that it is taking advantage of a near record low-point in the share price – the result of market fears over costs at the company – and pointing out that the volume weighted average price of Neverfail’s shares for the 12 months up to CCA’s offer was A$2.22.
But there have also been claims that the CCA bid fails to account for the long-term potential for Neverfail. Globally, the bottled water market is among the most dynamic across all the beverage categories, with retail sales alone standing at just under US$34 billion in 2002. The HOD market, meanwhile, is still only worth US$4 billion but companies such as Nestle are expecting annual growth as high as 10-15% up until 2007, suggesting enormous growth potential.
As the leader in Australia, with a 65% share of the bottled water market, Neverfail offers a unique opportunity to enter a growing domestic market – where water is now the second largest component of the soft drinks market, with the second highest growth rate behind the fledgling energy drink segment – as well as being a doorway to Asia.
As it tries to convince its shareholders not to accept the current CCA offer, Neverfail will point out that this sort of growth potential has commanded valuations and multiples in excess of CCA’s bid in similar deals recently. Danone’s acquisition of California-based McKesson Water Products was priced at 13.2 times EBITDA or 10.4 times after the value of tax savings was taken into account. Nestle Waters meanwhile paid US603.3m for Powwow Group, over four times Powwow’s annual turnover. CCA’s offer by comparison is about eight times EBITDA and about three times sales revenues of A$70m.
For now institutional investors are advising clients to hold firm in the hope that a counter offer will emerge. Investment bank Citigate has said there is a reasonable chance of a counter offer but also warned clients against buying aggressively above A$2.40.
For now CCA seems to hold the upper hand, with no rival bid yet having emerged and its 14.99% stake acting as something of a blocking tool. CEO Terry Davis has also pointed out that the Neverfail bid is far from the be all and end all of CCA’s acquisition plans for this year, with a larger share of the juice market a priority, so he can afford to play it cool.
“It’s not the only way we can increase our water share,” he said. “There are a number of other opportunities that we’ll look at…we’re not so hell bent on getting into the HOD market that we’re going to overpay for this acquisition.”
By comparison, Neverfail must walk a thin line between soliciting a profitable bidding war and seeing its share price fall dramatically should no rival bidder emerge and CCA’s offer be rejected – a situation from which both share price and management could take a long tome to recover.