Why has Carlsberg tabled a £3bn bid for Britvic, and why has the soft drinks maker knocked it back?

Four years on from an as-of-yet unfruitful mega-merger with Marston’s, Carlsberg has decided its glass is only half full in the UK, and tabled an audacious £3.1bn bid for soft drinks maker Britvic.

On the face of it, it looks like an odd match. Brewers and soft drinks makers don’t often – in recent history and this country at least – go hand in hand. And Britvic’s portfolio of brands, including Robinsons squash, Tango and R White’s lemonade, don’t exactly sit comfortably alongside the likes of San Miguel and Tuborg in Carlsberg’s roster. 

So what exactly is Carlsberg hoping a move for Britvic will bring? And which party stands to benefit most?

Can Carlsberg add scale via Britvic buy?

A report card assessing Carlsberg’s performance in the UK in recent years might read “room for improvement”.

Since its 2020 acquisition of Marston’s, it occupies fourth place in the brewing league table, with circa 10% of the market. The joint Carlsberg Marston’s Brewing Co (CMBC) venture produces three of the top 100 biggest alcohol brands in the UK off-trade: San Miguel, Kronenbourg and Carlsberg.

But “it’s probably fair to say their flagship brands have stalled a little bit,” says Rabobank analyst Francois Sonneville. He points to Madrí and Cruzcampo, propositions brought to market by competitors Molson Coors and Heineken, and says that – bar the recently rebadged 1664 Bière – CMBC has not been as successful in producing “new products for a changing consumer”.

With UK consumers shunning booze or moderating their alcohol intake, big brewers have increasingly turned to alcohol-free propositions to protect their position.

CMBC’s moves in this segment have so far been hit and miss. Its Brooklyn Special Effects pulled in £2.5m last year [NIQ 52 w/e 24 April 2023], but Carlsberg 0.0 – relaunched last year for the third time – has still only mustered sales just shy of £400k.

Therefore, a move into soft drinks feels “more like a defensive move” rather than an offensive one, Sonneville says. 

Carlsberg’s ‘beyond beer’ ambitions

Carlsberg hasn’t shied away from its ambition to expand outside beer – where it currently generates just 2% of its total volumes globally. Sonneville says the brewer will have noted the successes of Danish brewing peer Royal Unibrew, which now generates more than 50% of its revenue from non-beer products, as well as Molson Coors in the US, in weighing up diversification.

“It was only a little over 15 years ago that C&C Group was selling its soft drinks business to Britvic, but times have changed and it is important for brewers to look at all the assets that they have and use them in the most efficient way,” he says.

Carlsberg has “already dipped its toe into the water” by launching soft drinks such as Tuborg Squash Light and Xixia Pineapple & C in Denmark and China, explains AJ Bell investment director Russ Mould.

However, a move for Britvic – number two in UK soft drinks behind Coca Cola Europacific Partners (CCEP) – would “turbocharge its position in this sector”, Mould says.

“Carlsberg seems to have taken the view that it needs to diversify to protect its future and Britvic looked like a ripe opportunity potentially at a reasonable price,” he adds.

Is Britvic a good target for Carlsberg?

Britvic is a solid performer in a challenged soft drinks category, which has been hit by inflation and consumers trading down. Mould describes Britvic as “a classic example of a company that quietly got on with the job”. Its revenues for the six months ended 31 March were up 11%, to £880m. Interim pre-tax profits, meanwhile, rose 10%, to £60m.

While its brands may lack the star power boasted by CCEP, there’s plenty to pique Carlsberg’s interest, not least the licence to manufacture and sell the PepsiCo portfolio of brands in the UK and Ireland.

These brands – which include Pepsi, 7up and Mountain Dew – are well known to Carlsberg, which bottles for PepsiCo in Norway, Sweden and Switzerland. PepsiCo has already given the green light, indicating it will waive the change of control clause in the bottling arrangements it has with Britvic, should a deal come to pass.

Britvic also has an eye for emerging consumer trends. Through incubation and acquisition, it has built up a portfolio of challenger brands that resonate with younger consumers. Revenues in its “new growth spaces” division, which includes healthy beverage brand Plenish, adult soft drink London Essence Co and Jimmy’s Iced Coffee, were up 63.5% in the six months to 31 March, according to its interim results.

Does Britvic want to sell up?

Britvic has so far taken a dim view of Carlsberg’s approach, rejecting two offers in short succession before issuing a stock exchange announcement decrying the deal, which it said “significantly undervalues Britvic, and its current and future prospects”. Carlsberg now has until 19 July to submit a third bid. 

The brewer’s two offers – the first at £12 per share and the second at £12.50 per share – represented premiums of 23% and 29% above the London-listed Britvic’s trading price prior to 21 June.

The second offer was “at a sensible price”, offering an equity valuation of 13.1 times Britvic’s 2023 EBITDA, according to Bernstein analysts Trevor Sterling, Nadine Sarwat, Adrien Rabier and Matthew Cheung. They note there would be “some operational synergies” between CMBC and Britvic, as well as between Britvic and Carlsberg’s Kronenbourg beer operations in France.

There is also “quite a bit of overhead associated with being a separately listed company”, Sterling adds. “You’ve got a board chairman, a well-paid chief executive and all the legal infrastructure required to service a plc.”

Analysts at Barclays are warmer still on the deal. They note “significant scope for synergies, namely from Britvic switching from third-party distributors to Carlsberg’s platform”, adding distribution costs currently take up 11%-12% of the soft drinks maker’s revenues.

Who gains most from a merger?

But risks remain. For Britvic, there’s the possibility that being absorbed into the world’s third-largest brewer, and one with relatively limited expertise in soft drinks, could do more harm than good.

“Their big fear is going to be that this is a spur of the moment thing for Carlsberg and there is no follow on,” says Sonneville. He notes Britvic is “trotting along nicely” in the UK, Ireland, France and Brazil, but there is no guarantee Carlsberg will be successful in scaling its owned brands to other markets.

“There are good products in Britvic’s portfolio, but they’re products that are very well known in the UK. Soft drinks markets are, with a few exceptions, quite local, so it’s almost like building a brand from scratch.”

Stirling agrees. He says the biggest risk is “around the sustainability of Britvic’s commercial performance”.

“They have done a good job of growing faster than their underlying markets, but that’s always a hard trick to replicate,” he says. “It’s much easier operating in markets where you have lots of embedded structural growth.”

For Carlsberg, the 2008 acquisition of Scottish & Newcastle, which saw it and Heineken pay £7.8bn for the British multinational brewer, serves as a reminder of the risks of such large-scale M&A.

Not only did the Danish company overpay for its stake, it also won full control of Baltika Breweries, only to have to give up ownership of the company following Russia’s invasion of Ukraine in 2022.

Carlsberg shareholders will have to “carry the can” for any unforeseen hiccups that hit Britvic in the future, Sterling says. He notes the group’s share price – down 8.3% since last week  – indicates “shareholders are very worried there is a deal that goes in at a significantly higher price”.

What happens next?

Andrew Ford, analyst at Peel Hunt, says Britvic holds most of the cards, should it decide to come to the negotiating table.

Britvic CEO “Simon Litherland is quite an ambitious guy,” he says. “He believes the company could be a lot bigger than it is, particularly internationally. You just need to look at their recent trail of acquisitions to see the ambition.

“Obviously if the offer came in at £14 plus [per share], then you’re going to have quite a lot of pressure from shareholders, But from the management side, I think they’re ambitious and genuinely believe in the growth potential at the company.”

Ford believes that, despite rallying by almost 25% following the news of the bid, the fact Britvic’s share price remains below the £12.50 offered by Carlsberg suggests a deal remains doubtful. 

“It doesn’t feel that there’s a lot more juice in the tank from Carlsberg, especially with the dissatisfaction being shown by their own shareholders,” he says. “On the flip side, if there’s other people in the market that have any interest in Britvic at all, they’re going to need to put an offer on the table. The obvious name that jumps to mind is Suntory.

“If you were ever interested in Britvic, now is the time to make an offer or keep your peace.”