Description

C&C is not new to VIC, it's been written up in 2023 by aa123, in 2022 by alli718 and by straw1023 in 2018 (with the old ticker GCC). I'm not going to rehearse the whole business model and characteristics: not much has changed in the fundamentals from the last write up. 

However, in October 2023, the company announced plans to return €150 million to shareholders over the next three fiscal years (FY25-FY27, with YE in Feb), while aiming to maintain a leverage rate of 1.5x-2x. With a current market cap of €737 million, this amounts to 20% or roughly 7.4% per year. This capital return plan was confirmed at the latest results in June. We also had some accounting issues leading to a new CEO (another one), a new CFO who started in March 2024, and finally the involvement of an activist last month: these should create a catalyst for value realization in the short to medium term. 

As a reminder, C&C is a vertically integrated company that owns brands and operates as a wholesale distributor. Approximately 80% of their revenue comes from on-trade sales, with the remaining 20% from off-trade. The company produces, markets, and distributes branded beer, cider, wine, spirits, and soft drinks across the UK and Ireland.

In 2018, C&C acquired Matthew Clarke Bibendum (MCB) from the distressed Conviviality for £1, along with around £135 million in short-term debt and overdue tax liabilities. This acquisition added the largest UK drink wholesaler, with approximately £1 billion in sales and low to mid-single digit operating margins, to C&C’s portfolio. Prior to acquiring MCB, C&C generated €550m-650m in sales and €100m-120m in operating profits. The company, like everyone else in the industry was significantly impacted by COVID-19 closures but gradually recovered as on-trade activity resumed. In 2022, they sold their minority stake in Admiral Taverns, and in 2023, they encountered issues with their ERP implementation (which were also described in aa123's write up). The impact from the ERP debacle was quantified in €25m. About 20% of that, ca. €5m, came from delayed pricing actions: for a period of time earlier in 2023, C&C was under recovering cost that they experienced from third-party suppliers. And they were unable to pass on that price increase to customers in a timely manner. This should be now solved as the company has then eventually taken the price action. Another 40%, ca. €10m, was from temporary investment needs to underpin service levels, to operate depots and maintain efficiency and reliability of the supply chain and delivery process. Now OTIF (On Time in Full) service levels are ahead of historic levels so this should also be behind us.

The last 40%, ca. another €10m, was associated to lost customers, especially in the independent free trade which tend to be less sticky vs larger franchises. C&C is growing back some market share, in a “challenged” market, but the full recovery of the lost business will take some time. The operations within the distribution business are now consolidated platform and that now leaves scope to deliver further efficiencies and further improvements in service levels. We can expect margins will go back to around 4% at some point (below peer LWC’s 6%, as LWC is more skewed to independents and geographically focused, but on the other hand, it’s smaller) but this is not going to happen straight away in 2025.

My base case numbers are not far from consensus, and I don’t even assume distribution margins going back to 4% or branded margins above 18% in Feb 2028. It’s a somewhat conservative set of assumptions, with margins below pre-pandemic and pre-MCB.

That results on the multiples below:

With the distribution margin recovery, we should see mid-teens EPS growth (FY25-FY28), partly driven by the buyback (I’m assuming half of the capital returns to be buybacks and half dividends as management said they are implementing a progressive dividend policy). In addition, we should get a dividend yield of 2.7%. Even assuming a small multiple depreciation, a low teen IRR seems very achievable.

As a reference, pre-covid average multiples were in the region of low to mid-teens:

Management has indicated lower forward margins for the branded business vs history as brands have been underinvesting in marketing and promotion, and C&C don’t want to risk attracting competition in the markets they dominate (cider in Ireland and beer in Scotland, with Bulmers and Tennent’s which represent respectively 35% and 50% of branded EBIT). For margins to return to 20%+ in the branded division, C&C would need to reduce marketing spend, which could invite potential competitors. C&C will continue investing in their brands, impacting margins by 300-400 basis points. Additionally, for a margin recovery in the branded vertical, C&C must pass on the full cost inflation, which will take time as they aim to avoid alienating core retail or large on-trade customers and end consumers. Anyway, even with investment in promotion, with time margins should recover closer to historical levels. Assuming (in a bull case) that the business recovers to a 20% operating margin in the branded division (vs 25% pre covid) and 4% in the distribution division, operating profit would reach €132m, leaving the stock trading at ca. 6x EBIT and less than 8.5x PE. Which would point to 22% EPS growth and an IRR north of 20%.

So, going back to the recent developments, what happened recently was that at the preliminary results announcement, the company also announced an accounting revision of some items related to the past three years. Patrick McMahon, the CEO, was CFO at the time of the accounting slipups so he stepped down. Ralph Findlay, who was already the Executive Chairman is now in the CEO seat. In addition, C&C took a non-cash exceptional charge on the Magners brand in the UK for €125m.

In terms of the actual accounting adjustments, they’re not particularly material: it’s a cumulative impact of €5m over three years. Andrew Andrea, the CFO who started in March (who comes from Marston, like Ralph Findlay), said that the accounting changes are the result of a detailed review of the balance sheet (and they feel the accounts have been closely audited). I don’t have a strong view on the Magners write-off, again it wasn’t contributing much and it’s a non-cash charge.

In terms of management changes, this is the 4^th CEO in four years: after Stephen Glancey left in 2020 (after having led the group for eight years, contributing with the acquisition of MCB), he was succeeded briefly ad interim by Stewart Gilliland and David Forde took the helm in November 2020. He faced a tough period during lockdowns and supply chain issues and then the ERP system upgrade disappointment led to his resignation. The then CFO Paddy McMahon was promoted to address the ERP issues and stabilize the company but then he also left because of the most recent account issues. Ralph Findlay now has the position but it’s not for the long term. He realizes there’s an opportunity to steady the ship and then he’ll leave: it’s expected he’ll stay for up to 12-18 months. And Andrew Andrea seems to have started with the approach of getting the financial house in order too.  

The other recent development is the involvement of Engine Capital, an activist investor that holds around 5% of the company’s outstanding common shares. The activist is calling for a strategic review, including a sale. “we believe the best path forward is for the Board to explore strategic alternatives for the Company. C&C remains a unique and strategic asset, which is why we are confident that buyers would pay a price that is far superior to its standalone value, especially considering the time value of money and execution risks (including CEO succession risks)”.

I believe the activist is somewhat preaching to the choir: the new management seems to have started with the intention to get things on track for any potential buyer. Also here on VIC, C&C has been indicated as a potential buyout target for years. Engine Capital adds that they "suspect the optimal strategic acquiror of C&C’s assets is a scaled company with a global, established brand that could optimize marketing expenses, benefit from U.K. manufacturing capabilities, reduce general and administrative expenses, benefit from procurement savings, and leverage C&C’s leading distribution businesses to accelerate the growth of its own branded and higher margin products.". Difficult to say who would be the most likely buyer. Also PE, given limited leverage and a cash generative business could work: I’ve done a quick very basic return calculation that shows that with a 28% premium to current price and 50/50 equity/bond financing, a PE could extract a 20%+ IRR (with quite conservative assumptions: a recovery of the distribution margin closer to 4% would turn into higher returns and would justify higher premiums).

Some considerations

• The whole industry is going through some rough times together with other discretionary spending verticals. Beer however, with consumers trading down, is holding up better. Guinness, within Diageo has been performing very well. However, Guinness is an exceptional brand that’s not necessarily a good benchmark for C&C. And it also benefits from opposite weather patterns vs C&C (cider is consumed more when it’s sunny vs Guinness probably a bit more when it’s not).
• Potential buyers may well value the distribution business and the branded business on different multiples, assigning a lower multiple to the distribution, which now represents 40%+ of operating profits. And in the branded division, Tennent’s is a super brand and Bulmers also dominates the market in Ireland, however cider as a vertical could see competition from emerging categories such as hard seltzers and pre-mixed and ready to drink cocktails.

Conclusion

I believe that C&C offers a good risk/reward profile at the current valuation, with double digit IRRs achievable under conservative assumptions. Additionally, now it’s probably the best set up for the company to be acquired than at any point in recent years.

Catalyst

- sale of the company

- cash returns