Shore Capital analyst Phil Carroll, in a note on a C&C investor day held in the UK, wrote that CEO Stephen Glancey and finance director Kenny Neison had spent four years stabilizing the plc. (key cider brands Bulmers, Magners) and were now moving on to the ‘transform’ phase.
Praising C&C’s “high quality” management team, Carroll calculated that the company had further acquisitive firepower – namely a war chest of over €100m ($130m) based on a balance sheet leverage level (debt ratio relative to total assets) of 1.5x that has the potential to rise to 2.5x.
Consolidation…then transformation
“Arguably, there is already clear evidence of the commencement of this stage with the recent acquisitions (subject to competition authorities’ approval) of the [craft-based] Vermont Hard Cider Company (VHCC) and the Gleeson Group,” Carroll wrote.
Shore Capital said that C&C had a significant international opportunity, especially for its cider business, but added that Tennent’s beer also had strong potential as an export brand, and was already sold abroad in Italy, Spain, Ukraine, Canada and the US.
Specifically in the US, C&C management said that its US acquisitions provided access to a market that was about to ‘explode’, a trend the Shore Capital analyst agreed with.
“This looks to be confirmed, in our view, by the recent market data showing cider volumes up 57% in the past six months and more recently up 81% in the past month,” Carroll said.
Cannibalization ‘should’ be limited
Although cider only account for around 0.3% of the long alcoholic drinks market in the US, growth to 1% in the next five years would imply category CAGR of 36%, while a 3% share would imply 78%.
“Cider falls into the craft beer category where it is currently circa. 7% of the total US beer market. Data shows that in areas such as Seattle and Washington, craft beer accounts for circa. 20% of the market, so again, the potential for category growth looks very promising,” Carroll said.
“Furthermore, we also note that, generally, imported cider and domestic cider do not compete for the same customer, which should limit any cannibalization impact on C&C’s total US sales.”
C&C could also use VHCC to distribute Magners in the States, the analyst said, noting that the underlying valuation of VHCC did not account for the potential for filling the gap left by the end of a deal (in mid-August) whereby the firm distributed Heineken USA cider brand Strongbow.
“Profits from the international business are expected by C&C’s management to account for circa. 20% of group profits by the year end to February 2016,” the analysts said.