If Magners cider owner C&C Group can pull off a successful takeover of the Spirit Pub group it would represent something of a throwback. The marriage of a branded drinks supplier to an on-trade retail estate conforms to a favoured 20th century model - if the producer owns the pubs they can sell more stuff.
C&C’s approach for Spirit took the City by surprise and brought a swift rebuff from the pubco’s board, even though it valued the company £10m higher than an earlier £750m offer from Greene King and had a bigger cash element.
The Spirit board and shareholders are looking for the overall value of any offer over time,” believes Investec analyst Ian Hunter.
“They may feel Greene King could offer more because the synergies between its retail business and that of Spirit allows costs to be taken out. It’s a similar argument to that used by Fyffes in its [ultimately failed] bid for Chiquita.”
Spirit Group
Has had an on-off relationship with Punch Taverns, which set it up in 1999 to handle various pub acquisitions. It was demerged in 2002, bought back in 2006 and demerged again in 2011 to become a standalone plc.
Along the way, it bought 1,400 pubs and restaurants from Scottish & Newcastle, several senior figures from which now hold top jobs in C&C, including chief executive Stephen Glancey.
Spirit has 750 managed pubs - a third of which are in London and the South East - and 450 leased properties.
Retail brands include Fayre & Square, Chef & Brewer, Flaming Grill, Wacky Warehouse and Taylor Walker.
The Greene King deal would bring ready savings by adding brands such as Hungry Horse and Loch Fyne to Spirit’s Chef & Brewer and Fayre & Square.
C&C is a less seamless match, but Spirit offers it the opportunity to secure prime billing for Magners in 1,200 pubs at a stroke, strengthening its position in England where it has struggled to sustain growth in the saturated cider market it helped to create.
Some 86% of C&C’s operating profit comes from its Irish and Scottish operations. “T he management has been clear that he aim is merely to stabilise the business in England, especially with the level of pressure in the off-trade,” says Hunter. “Any growth they see as coming from the US and elsewhere.”
C&C chief executive Stephen Glancey this week restated its long-term faith in the US despite half-year results showing a disappointing performance in that market. The Spirit bid represents a different approach to tying up on-trade distribution than in Ireland and Scotland, where the acquisitions of wholesalers Gleeson and Wallaces Express gave it access to a broad portfolio of on-trade customers. C&C CEO Stephen Glancey this week argued that “our route-to-market capability is not matched in England and Wales and the concept of vertical integration in the sector is well-established”.
While an improved offer for Spirit is expected, C&C has plans B and C under consideration. Group financial director Kenny Neison revealed possible fallback plans included collaboration with other brand owners, which could give it “a bit more muscle” or downsizing to become a niche player in England. “That doesn’t prevent you from being profitable”, Neison added.
In the short-term, Magners needs a leg-up - Original is number three in take-home but saw value sales slide 6.2% in the last year (Nielsen, MAT, to 13/9/2014). Its performance in the booming flavoured cider market was even worse, with both Magners Pear and Orchard Berries down more than 30%. The Shepton Mallet Cider Mill subsidiary’s Blackthorn is also shaky, down 10.7% over the same period.
“This deal will give it the armoury to put its products into wider distribution but in the big scheme of things it’s not that large,” says Hunter. “Spirit is 2.5-3% of the UK pub estate.”
C&C believes Spirit would provide a “compelling consumer platform” but is it enough?
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