Friday 19 April 2019

Time for C&C to can acquisitions plan as profits fall flat

With sales down by a third in the last decade - despite blowing €553m on sometimes catastrophic buyouts - C&C needs a new growth strategy, writes Dan White

C&C operating (pre-interest) profits fell 8pc to €95m while sales (excluding excise duties) were down by over 15pc to €559m for the 12 months ended February 2017
C&C operating (pre-interest) profits fell 8pc to €95m while sales (excluding excise duties) were down by over 15pc to €559m for the 12 months ended February 2017

Dan White

Having spent more than half a billion euro - most of which it has since written off - on acquisitions over the past decade and failed to grow either profits or sales, drinks manufacturer C&C is going around in circles.

After another disappointing performance last year, is it time to call time on C&C's strategy?

C&C operating (pre-interest) profits fell 8pc to €95m while sales (excluding excise duties) were down by over 15pc to €559m for the 12 months ended February 2017.

These disappointing numbers have fed through into the C&C share price, which has fallen 9pc over the past year and under-performed the basket of beverage shares traded on the London Stock Exchange by 24pc.

Best known in this country for its Bulmers cider brand, C&C has been completely reshaped over the past eight years. In 2009 it paid global brewing giant AB InBev £180m (€200m) for its tired Scottish lager brand Tennent's. The same year saw it fork out a further £45m (€50m) for second-tier English cider producer Gaymer.

The following year it turned around and sold its spirits division, which included such iconic brands as Tullamore Dew and Irish Mist to Scottish distiller William Grant for €300m. C&C justified the sale of its spirits division on the grounds that its scale was "sub-optimal".

That doesn't seem to have deterred William Grant. It has done a superb job with Tullamore Dew, which in 2016 became the second Irish whiskey brand to break the one million cases annual sales barrier.

There was worse to come. In 2012 it paid a scarcely credible $305m (€230m) for the Vermont Hard Cider Company (VHCC), which at the time was earning annual profits of $10m and had net assets of $10m.

In 2013 it paid €58m for Gleeson's Irish drinks distribution business.

Throw in the $27.5m (€20m) it handed over for Hornsby's, 'the number two US cider brand' , in 2011 and that brings its total acquisition spend between 2009 and 2013 to €553m. Unfortunately, as those of us who have on occasion over-imbibed can testify, such a binge was inevitably followed by the mother and father of all hangovers.

If these acquisitions had delivered the goods then no-one would have objected. But it is now crystal clear that they have not. C&C recorded operating profits of €212m and pre-tax profits of €198m on sales (before excise duty) of €841m in the 12 months ended February 2007. The results published last week reveal that C&C's sales have fallen by a third and its profits by more than half over the past decade.

To add insult to injury, C&C has ended up having to write off many of its over-priced acquisitions. The 2017 results, which were published last week, contain a €150m "exceptional" item, of which €129m was accounted for by a write-down of the value of VHCC.

The thing about exceptional items is that they are supposed to be just that - exceptional. Not at C&C it would seem. Last year's exceptional item came on top of a €38m exceptional item in 2016 and a €173m hit, largely caused by a €150m write-down in the value of its US brands, in 2015.

Add it all up and these acquisition-related write-downs come to at least €280m and total exceptional items to €361m over the past three years. It is now clear that not alone has C&C now completely written off its US business, it has also used exceptional items to significantly write down the value of some of its other acquisitions.

Between the jigs and the reels it would appear that C&C has now written off somewhere in the region of 60pc, maybe more, of its total acquisition spend. Not to put too fine a point on it, if the performance of Tullamore Dew under William Grant's ownership is any guide, C&C sold good businesses and failed to replace them with a business of similar or superior quality.

This seems to have been particularly true of its US cider business which had total sales of just €24m and operating profits of a mere €700,000 last year. C&C's assurances at the time of the VHCC deal that US cider was a 'high-growth' category with annual volumes growing in excess of 20pc now ring very hollow.

VHCC's volumes collapsed by a third last year and C&C has now farmed out the distribution of its products to US brewer Pabst - in a move widely seen as paving the way for an eventual sale of VHCC.

Far from being a high-growth category stateside, cider seems to have been just a passing fad with trendy consumers now increasingly opting for alcoholic soft drinks, flavoured malt beverages or fruit beer instead. C&C seems to have made the classic mistake of buying at the peak of a short-lived fashion which it mistook for a sustainable long-term business.

On this side of the Atlantic, C&C has also sub-contracted much of its distribution with AB InBev taking over the distribution of C&C products in England and Wales in December 2016. This strategy of using outside distributors in both its US and England and Wales divisions sits oddly with the €58m which C&C paid for Irish distribution business Gleeson's four years ago.

While C&C's problems last year were most acute in the US, it also found the going tough closer to home. Although operating profits at its core Irish division were up 3.6pc to €48.6m, sales fell by 4pc to €242m. A good summer helped sales of its flagship Bulmer's cider brand, with volumes increasing by 2.8pc. However, with volumes in the cider category as a whole up 6pc, this meant that Bulmers lost ground to new entrants such as Heineken's Orchard Thieves - with its market share falling from 65pc to a still-commanding 62pc.

Sales and operating profits fell at both C&C's Scotland, and England and Wales, divisions. Scottish sales were down 6pc to €186m and operating profits fell by 2.1pc to €32.6m while sales in England and Wales fell by 7.5pc to €84m and operating profits dipped 21.5pc to €7.3m.

The company blamed its poor Scottish performance on a sagging economy while aggressive promotion and price-cutting of its Magners brand (C&C doesn't own the Bulmers brand name outside the 26 counties) was the main culprit in England and Wales. The good news is that this seems to have had the desired effect, with Magners' market share up from 5.8pc to 6.4pc.

The senior management team at C&C, including chairman Brian Stewart, chief executive Stephen Glancey and chief financial officer Kenny Nelson, are all alumni of Scottish & Newcastle, the UK brewing group that was gobbled up by Heineken and Carlsberg in 2008.

Unfortunately for C&C shareholders, their strategy of creating a sort of S&N in-exile hasn't worked. The reality is a string of over-priced acquisitions that range from the catastrophic to merely inadequate. A C&C spokesperson pointed out that the company's share price was just €1 when the current management team arrived and that they have returned more than €150m to shareholders through share buy-backs.

Nevertheless, as its performance over the past decade shows, C&C's isn't growing, merely travelling around in ever-decreasing circles. The company clearly needs a change of direction.

When C&C shareholders gather for the company's annual general meeting on July 6 they need to make this point very clearly. Business as usual is no longer an option for C&C.

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