Carlsberg is on a mission to become a “UK powerhouse”. Having struck a £3.3bn deal to acquire Britvic this morning, it has set out ambitions to build strength and scale across alcohol and soft drinks.
The combined UK company – to be known as Carlsberg Britvic – will be a “one-stop shop” for booze and soft drinks, with a range that meets a variety of customer needs, said the Danish brewer’s CEO Jacob Aarup-Andersen.
Aarup-Andersen said Carlsberg would draw on its experience in soft drinks in global markets, as well as from its merger with Marston’s in the UK, to make a success of the deal, in a message that contrasted with scepticism from investors.
Read more: Why has Carlsberg tabled a £3bn bid for Britvic, and why has the soft drinks maker knocked it back?
“There is significant value creation when we combine major beer businesses with major soft drinks businesses in core markets, and we have a proven business model around that,” he said.
In markets where it has combined beer and soft drinks businesses, Carlsberg’s operating margins exceed its western European average, he pointed out. “This is not a leap of faith. This is a model that we know incredibly well, and have a proven track record in,” he said. “And it will be led by people who know how to drive value.”
Carlsberg’s reshaped portfolio
The deal will meaningfully shift the shape of Carlsberg’s business at a group level, taking soft drinks from 16% to 30% of total volumes. In the UK, Carlsberg could soon be predominantly a soft drinks business with a brewer bolted on, rather than the other way around.
The move could also be seen as a means of reducing its exposure to beer, having lost the rights to its best-selling beer in the UK – San Miguel – to AB InBev.
However, it has also agreed to buy Marston’s out of the CMBC joint venture for £206m, helping to facilitate a smoother integration of Britvic.
Aarup-Andersen was keen to stress the deal was not about Carlsberg “reorientating away from beer”. He insisted Carlsberg could cope with the loss of San Miguel by growing its existing portfolio of world beer brands, and that the Britvic deal was “completely unrelated” to last week’s announcement.
The brewer would remain open to growing its brewing business through M&A should the right opportunity arise, he added.
PepsiCo as kingmaker
Given the potential synergies from combining the two companies – Carlsberg estimates operational savings of £100m over a five-year period – some consolidation seems likely. Aarup-Andersen insisted, however, Carlsberg Britvic wouldn’t be downsizing – at least not in the physical sense.
“When you look at our breweries across Britvic and Carlsberg UK, we see good utilisation. Both businesses are in volume growth, we don’t expect to see any major brewery consolidation.”
PepsiCo’s hand in the deal is now clearer to see. The US-headquartered company could have been a stumbling block, given the importance of its brands to Britvic’s UK and Ireland business. But its decision to consolidate its European bottling operations – as well as its willingness to waive a change in control clause in its licensing agreement with Britvic – provided “a window of opportunity” for Carlsberg to strike a deal, Aarup-Andersen revealed.
The deal means Carlsberg will be PepsiCo’s largest partner in Europe. Carlsberg says it has already agreed terms on new bottling agreements with PepsiCo, which will enable it “to invest for the long term” in the Britvic business.
“Pepsi is progressing towards consolidating its bottling network and we see opportunities to be part of this journey and possibly add more geographies to our portfolio in the coming years,” Aarup-Andersen added.
What price is fair?
Carlsberg’s latest offer represents a 36% premium on Britvic’s closing share price on 19 June – the day before news of Carlsberg’s interest in the soft drinks maker broke – and has the unanimous approval of the Britvic board.
The proposed transaction would create “an enlarged international group” that was “well placed to capture the growth opportunities in multiple drinks sectors”, said Britvic non-executive chair Ian Durant.
However, this is in the context of strong Q3 trading numbers for Britvic. Revenues are up 6.3% and volumes have climbed 2.2%, meaning Britvic is continuing to outperform a challenging soft drinks category. As such, investors may feel the price is still not quite right. The 25p per share sweetener being offered in the form of a “special dividend” suggests Britvic’s board know this.
Analysts at Peel Hunt said the strategic interest of both Carlsberg and PepsiCo to consolidate means the deal “will not be allowed to fail”. Perhaps, they postulated, Britvic shareholders should hold out for a better offer.
With 75% of Britvic investors required to vote in favour, and shares in the company yet to reach the amount offered by Carlsberg, they may feel more juice can be squeezed from the brewer.
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