Hopes that Britvic (BVIC) would merge with rival AG Barr (BAG) to form a formidable UK drinks giant were dashed this month when the boards of the two companies locked horns over the terms of the deal. It was Britvic's board which rejected the revised offer from AG Barr, claiming the merger benefits were "materially less than before" as performance had "improved significantly" since last summer, the share price was almost twice the level it was, and that the company's prospects as a stand-alone company were "bright".
- Increased investment in international expansion
- Restructuring under way
- Merger with AG Barr scrapped
- Volumes falling
- Tough trading in Ireland and UK
- High debt
Quite a volte-face, given that just six months earlier Britvic's shareholders had agreed to the merger on less favourable terms. And with the deal scuppered, we believe it's now time to sell the shares. The potential merger with AG Barr was reason enough to hang on to shares in Britvic. It would have made both commercial and strategic sense, offering operational and financial benefits. Now on its own, though, Britvic doesn't look nearly as tempting.
For starters, the balance sheet is heavily geared. In mid-April, net debt stood at £594m, compared with net assets of just £600,000, and broker Canaccord estimates the group's pension deficit stands at about £250m. Admittedly, Britvic is targeting £30m of annualised cost savings by 2016 as part of a restructuring plan spearheaded by new chief executive Simon Litherland, and this should help address the debt issue. It will include the closure of two factories in the UK, combined UK and Irish operations and a significant headcount reduction. However, this is a major overhaul and will take some time to pay off. Additionally, delivering this kind of change against a backdrop of falling volumes, weak consumer spending and an intensified competitive landscape in the UK will be challenging.
True, improved performance at the half-year stage in May beat market expectations, as underlying operating profit jumped 28 per cent, prompting a rise in the share price. Nevertheless, first-half profit growth was driven by strong pricing and cost control - a trend echoed in this week's third-quarter update. Volumes, in fact, fell across all categories during the first half, with particularly tough trading in GB Stills and Ireland, which together accounted for 38 per cent of 2012 revenue. This performance compares with rivals AG Barr and Nichols (NICL), both of whom are growing volumes and revenue - even in the UK.
| BRITVIC (BVIC) | ||||
|---|---|---|---|---|
| ORD PRICE: | 520p | MARKET VALUE: | £1.3bn | |
| TOUCH: | 520-521p | 12-MONTH HIGH/LOW: | 536p | 278p |
| FWD DIV YIELD: | 3.8% | FWD PE RATIO: | 13 | |
| NET ASSET VALUE: | 0.2p* | NET DEBT: | £594m | |
| Year to 30 Sep | Turnover (£bn) | Pre-tax profit** (£m) | Earnings per share** (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 1.14 | 109 | 36.5 | 16.7 |
| 2011 | 1.29 | 105 | 33.7 | 17.7 |
| 2012 | 1.26 | 84.4 | 27.2 | 17.7 |
| 2013*** | 1.28 | 106 | 33.8 | 18.0 |
| 2014*** | 1.31 | 129 | 41.2 | 20.0 |
| % change | +2 | +22 | +22 | +11 |
Normal market size: 5,000 Matched bargain trading *Includes intangible assets of £319m, or 130p a share **Underlying PBT and EPS figures ***Numis Securities estimates Beta:0.67 | ||||
The other issue with Britvic is that roughly half the group's revenues are derived from brands it does not own, according to broker Canaccord Genuity, though Britvic itself does not break down this information. What Canaccord is referring to is Britvic's exclusive bottling and distribution agreement with PepsiCo in the UK and Ireland. Being tied into a concentrate supply-driven model (Pepsi-owned brands) will make delivering sustainable value growth in its carbonates range even more challenging.
That said, Britvic is accelerating international expansion, and will use cost savings to invest £10m a year in the international division by 2015. It has even teamed up with a company in India to distribute Fruit Shoot in the sub-continent next year. International sales rose 25 per cent to £18m at the half-year stage, so it seems sensible to invest in fast-growth markets, but bear in mind that sales here represented just 2 per cent of 2012 revenue.
Looking at the valuation, the shares are trading on a forward PE of 13.8, which is expensive compared to the two-year historical average of 12, and the five-year average rating of 13. And, while the valuation is lower than AG Barr and Nichols, the balance sheet issue and less attractive growth profile more than justify that.
