Description
Britvic is the 2nd largest soft drink company in the UK behind Coke bottler CCE. They are the Pepsi bottler in the UK and also own well-known brands Robinsons, R Whites lemonade, Tango, J20 and Fruitshoot. The company was taken public at 230p in December 2005 by a consortium of owners (Intercontinental Hotels, Whitbread, Pernod Ricard and Pepsi). Pepsi retained their share in the business and the other three sold out to focus on their respective core businesses. Then the company started to show weakness on the top line and missed EPS estimates due to an overly promotional soda pop environment and weakness in carbonated soft drinks.
At 213p, the company trades for 6.2x 2006 EBITDA and 11x 2006 earnings. For Magic Formula junkies, Britvic would in all likelihood show up on a UK Magic Formula list because of its 9.9+% current year pretax earnings yield and 50 - 75% return on tangible capital. For those who have a $700 copy of Margin of Safety, you might find it interesting that Baupost Group has taken a large position in Britvic in the last few months.
My thesis is that the company's stock price is temporarily depressed due to a couple earnings misses resulting from a weak sales environment for carbonated soft drinks and a shift to healthier drinks in the UK to which Britvic has not yet fully responded. It is my view that normalized earnings are roughly 19-21p, and analyst estimates show EPS of 23-24p in 2008 which seems reasonable to me. I think fair value for the business is 7-7.5x current EBITDA or 260-275p for the stock. To put this into perspective, the stock was 270 only a few months ago prior to their earnings stumble. Also, I think there's a fair chance earnings get to 23-24p over the next three years through new product introductions/bolt-on acquisitions and that the multiple goes up to 14-15x getting us over 340p. At current prices I think our downside is well protected and the risk-reward is attractive.
Here are the numbers (in British pounds or GBP):
Price 2.12 GBP
Shares 214.8MM
Market cap 456MM
Debt 330MM (out of 450MM credit line)
EV 786MM
2005A 2006 2007
Sales 698MM 700MM 765MM
EBITDA 123MM 123MM 137MM
EBIT 70-75MM 70-75MM 85MM
Net Income nm 37MM 45MM
EPS nm 19.1p 21.4p
P/E 2006 11.2x
P/E 2007 10x
TEV/EBIT 06 10.1x
TEVEBIT 07 9.3x
TEV/EBITDA 06 6.2x
TEV/EBITDA 07 5.7x
Notes - Net income & EPS in 2005 are not relevant because the company had a different balance sheet in 2005 and thus less interest expense. D&A is about the same as the company's 45MM GBP capex budget.
Market share/segment information - 95% of Britvic's business is based in the UK. The British soft drink market features Coke with 29% share, Britvic at 22%, GSK 5% and Danone 4%. About half of Britvic's sales are in the carbonated soft drink (CSD) segment and half is in stills (juices, squash, water). (Squash is a concentrated juice drink). Profitability is about even between these two segments. In terms of channel, Britvic does 64% of their sales in the take home segment and the remainder in the on-trade business (taps in pubs, restaurants, catering, etc). In the take home market, Britvic has 12% market share vs. CCE at 27%, GSK at 7% and Danone at 6%. Coke outsells Pepsi 3 to 1 in Britain which explains CCE's dominance in take home. In the on-trade market, Britvic has 46% share vs. CCE's 32%. The reason Britvic has a higher market share in this segment is due to the previous owners involvement in the pubs and alcohol markets. Also, Britvic owns J20, Robinsons and R Whites lemonade, all of which are popular in the pubs in the UK.
A little Google research will show that there have been numerous private equity buyers interested in Britvic in the past, including Cinven Ltd., CVC Capital Partners and Doughty Hanson. A recent rumor picked up by Bloomberg is that PAI, a large European buyout fund with a lot of consumer-oriented companies in their portfolio, is interested buying Britvic. Also, I think Blackstone and Lion Capital (formerly known as Hicks Muse Europe) would be interested in this business. Lion Capital is active in UK consumer names having bought Weetabix and Jimmy Choo.
In December 2005, Lion Capital and Blackstone acquired Cadbury's European soft drinks business at 9x EBITDA. While the Cadbury business was spread out in various markets in Europe (Germany, Spain, France, Belgium) and had different brands (Schweppes, Orangina, Trina, Oasis), it is roughly the same size as Britvic's in terms of EBITDA, sales, headcount. A 9x EBITDA multiple for Britvic would imply a price exceeding 360p. I do not know how to handicap the chance of a buyout, but I think if the business flounders for a while it seems likely management will choose to get out of the public domain and run the company for a new, patient and well-capitalized private equity owner.
Stock repurchases are not yet under discussion but management said the issue will be raised at the next AGM (January 2007) unless the stock price gets lower. They are interested in bolt-on acquisitions and are aware that they should do an acquisition only if it is accretive.
The company has a good website and a fairly thorough offering circular which I recommend reading. Also the sell side has produced voluminous reports on the company.
Catalyst
Improving earnings, potential buyout offer from private equity