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

Sunday Independent (Ireland) - Business & Appointments - - FRONT PAGE -

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.

The thing about ex­cep­tional items is they are sup­posed to be just that

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