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Has Carlsberg had one too many? That is clearly what its shareholders fear. They marked down the Danish brewer’s stock by up to 8 per cent on Friday after news of its unsuccessful takeover approaches for Britvic — the second of which valued the UK carbonated drinks maker at £3.8bn including debt.
This is quite the downer. Carlsberg lost more than £1bn of value — more than the entirety of the premium that it had offered over Britvic’s closing price on Wednesday. There is good reason for the brewer to gather its wits rather than rush into another round.
The problem is not that Carlsberg is chasing a dud, at least in absolute terms. Britvic — maker of Tango sodas and Robinson’s Fruit Shoot — is a well-run consumer staples business. It is expected to manage mid-single digit revenue growth — at the high end for its category — with low double-digit operating margins.
Financially, too, Carlsberg has been reasonably prudent. At a 28 per cent premium to Britvic’s closing price on Wednesday, the brewer was offering some £700mn above market value.
There should be some costs to squeeze out by combining distribution networks to pubs and retailers, loading beers and sodas on the same truck, plus a smattering of cross-selling opportunities. Both companies are Pepsi bottlers, too, so putting them together might yield some benefit on contractual terms. If one assumes that Carlsberg could wring out synergies equivalent to 5 per cent of the target’s sales, that would yield an extra £100mn of operating profit. Taxed and capitalised, this would broadly cover the premium on offer.
The market reaction, however, goes beyond the specifics of this particular deal. The problem here is with Carlsberg’s hazy strategic logic.
The brewer’s challenge is that beer is hardly a growth market. As spirits become ever more popular, it is losing the so-called “share of throat” in many developed countries, including western Europe where Carlsberg is focused. That’s not a global phenomenon: in the developing world, consumption is still growing at the expense of local beverages. Yet that still leaves Carlsberg with an uphill battle to deliver on its enhanced 4-6 per cent long-term organic revenue growth target.
Buying a mature Northern European business, which also operates in a near-stagnant market, is unlikely to change that. Meanwhile, a cash bid for Britvic would raise Carlsberg’s leverage to 2.9 times ebitda on a pro forma basis, thinks Bernstein, which may put pressure on its recently announced buyback policy.
Rather than be handed a rather fizz-free M&A cocktail, investors might prefer to take the money and buy their own drinks.
