Hard sense behind soft drinks merger
The City is licking its lips over Irn-Bru maker AG Barr's audacious reverse takeover approach for the much bigger, but troubled, Britvic
Thursday 06 September 2012
The City trader with the medium-strength hangover admitted that he may have to cut back on the naughty fizz and switch to the soft stuff. Because when the statement hit his Reuters screen he seriously thought he was hallucinating.
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"The boards of Britvic and AG Barr note the recent press speculation and confirm that, following an approach by AG Barr to Britvic, they are in preliminary discussions which may or may not result …" read the usual dry legalese about moves that could shake up many thousands of lives.
Wait a minute. AG Barr is bidding for Britvic? Isn't AG Barr some tinpot Scottish outfit that's been selling 50 tins of Irn-Bru a year since 1870? And isn't Britvic a giant British success story, the provider of the juice behind Wimbledon (that would be Robinsons) and a distribution partner for the mighty Pepsi?
Our trader friend's confusion is perhaps understandable, though the fizz issue may have exacerbated it.
The respective size of the two businesses make it clear that this is a bold reverse takeover attempt, the sort of surprise tactic many thought dead.
First the numbers: under the proposed terms of an all-share deal, the much bigger Britvic would own 63 per cent of the combined company, with AG Barr shareholders getting the balance.
Those merger terms suggest a value for Britvic of 350p a share. This business is, as City jargon would have it, firmly in play.
In the market, Britvic jumped 41.3p to 369.9p while Barr closed up 34.6p better at 450.2p.
Those prices indicate the City thinks some sort of deal is now inevitable. AG Barr might get trumped, but Britvic as a standalone entity is history.
Shares in both companies, forgive us, fizzed upwards, leaving Britvic valued at about £895m and AG Barr at around £523m.
But the choice of management make it clear where the power in the new combine would lie.
Roger White of AG Barr would be the chief executive – that's the job that really matters – while the finance director would come from Britvic (John Gibney), as would the chairman (the ubiquitous Gerald Corbett).
Under this scenario, and the talks are plainly very well advanced whatever the statement claims, Britvic boss Paul Moody is out.
This deal excites the City for several reasons, not just because of the fees that the bankers at Rothschild and Citi will collect for talking up the "strategic merits" of the offer.
The companies can expect to get something like £15m – individual bankers a nice slice of that. Happy days, for some.
The wider implications of the bid is that it shows signs of confidence in the corporate world that have been lacking for some time.
Many City traders and bankers, analysts and management consultants, have been near unemployed for months. Clients are so worried about the potential fallout from the eurozone crisis that they daren't move in any direction. So no deals are being done; which means no fees are being earned.
If AG Barr feels able to launch such a strike, perhaps others will follow.
Does the deal make industrial sense? It seems to. AG Barr is strong in the North and with independent retailers. Britvic is strong in the South and with the pub trade. Britvic has stronger distribution channels than AG Barr, but the latter is credited with marketing savvy that has allowed it to punch above its weight, especially with the Rubicon range of fruit drinks, a major success story which now accounts for a fifth of its sales.
The brokers Canaccord Genuity said: "We are of the view that this is the best result for the Britvic shareholders as the senior management team as well as the board of directors would be significantly improved with the introduction of Roger White … in our view the AG Barr management team have a very strong track record and would add significant strength to Britvic from both an operational and financial performance perspective."
Another reason to assume the deal will go through is that Britvic has stumbled badly just lately. While both companies suffered from the poor weather earlier in the summer, with Barr warning at the end of July that interim profits would be below the previous year's level, Britvic had a shocker.
It revealed a £25m hit to profits when it was forced to recall its Fruit Shoots brand after discovering a design fault in the caps.
That might just be the sort of misfortune that can afflict any business, but it seems that Mr Moody is going to pay the price.
One City analyst said: "AG Barr has performed very well for the past four or five years. It has grown terrifically. But Britvic has slipped on banana skins all the way. Fruit Shoot was a disaster."
Assuming no hitches, it's a result for AG Barr, and probably for the City, too. Lips are being licked.
Fizzy mixers: Big brands in the deal
* The company behind Irn-Bru – dubbed Scotland's other national drink – has confirmed talks over a possible £1.4bn merger with Britvic, maker of Tango.
* AG Barr dates back to 1875 and also makes Tizer and Rubicon.
* The pair said a merger would create one of the leading soft drinks companies in Europe, with other brands including the Britvic products Robinsons, J2O and Fruit Shoot.
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