Irn-Bru To The Rescue

It looks like Roger White, the CEO of AG Barr, is onto something.

There will be many of you reading this who have never tasted Irn-Bru. Well, the advert opposite may help you better understand its market positioning and many of my friends say that the lady’s reaction demonstrates very clearly what some feel about its taste. However, I actually quite like its taste, which is a little like liquid chewing gum. Even though it is made in Scotland and the Scottish have a famed reputation for prudence, not many may be aware just what a relatively successful business AG Barr, or Barr’s as it tends to be known, is in the UK soft drinks firmament.

AG Barr have just made a merger approach to Britvic, a much bigger and probably more widely known soft drinks manufacture and distributor. Britvic makes Robinsons Squash and J2O and it seems to be taking the idea seriously enough to be talking about it publically. What caught my attention was that although Britvic has 5x the revenues and 3.5x the profits the first thoughts on valuation that have been floated appear to value Britvic at just 1.7 times that of AG Barr. It’s interesting because I can’t tell you how many times I end up discussing the arcane art of valuation with folk and here we have a very public example of some of the underling factors at play.

In Barr’s favour is that it appears to be  a tighter run ship, with little room for margin improvement, whilst Britvic has stumbled a bit in recent years, with a profits warning last year and other operational problems, and it may benefit greatly from some tough Scottish business overloardship. This is being signalled rather strongly by the suggestion that the AG Barr CEO, Roger White, would take control of the combined group if the deal goes ahead. Barr’s also sell its own products whereas 40% of Britvic’s revenues come from selling PepsiCo brands under an exclusive license.

Britvic is clearly in play and who’s to say that Barr’s will get it, as PepsiCo have an interest to protect here too. I’d have thought it unlikely that Britvic will remain independent for too much longer though as its shareholders should expect a better return than they have been getting of late. It will be interesting to see who it goes too and at what price. The fundamental driver of price should be the current value of future cash flows and it looks like there are several upsides to that: central cost savings, including culling senior management; economies of scale in UK distribution; and imposing tighter operational control on Britvic.

Whilst I don’t have the numbers to hand I’d be interested to compare the return on capital employed for each company, which I think would reveal AG Barr’s underlying economic strength and just why this deal makes a lot of sense to everyone. Roger White has made a great move here, as Britvic needs better performance and arguably, on the basis of his achievements to date, Roger has earned the opportunity to create one of Europe’s biggest soft drinks businesses and show us just what he can do with it.


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