|Shares Out. (in M):||310||P/E||0||0|
|Market Cap (in $M):||930||P/FCF||0||0|
|Net Debt (in $M):||173||EBIT||0||0|
- All numbers above in Financial Information in Euros
- I assume GBP.EUR = 1.15
This is an event-driven idea with several strong catalysts over the next 12 months that revolve around C&C Group's acquisition of Conviviality's Direct (aka on-trade; wholesale; or non-retail) group for £1. We have heard no chatter about this idea, and the press related to Direct has been ugly due to its near collapse.
The thesis is:
- Due to the backing of AB InBev (providing guarantee on all trade creditor debt), the purchased on-trade business will not death spiral and will be in a stronger position than it was with Conviviality (before Conviviality almost destroyed it through incompetence).
- As they now control a major distributor with enormous reach, C&C can aggressively push its own brands of cider and beer, esp in England and Wales, where it lacks market share. Their brands will return to growth.
- The close-knit relationship with AB InBev is intriguing and bodes well for C&C. Perhaps AB InBev and push C&C brands beyond the British Isles.
Pre Conviviality Direct
- C&C manufactures and distributes several brands of cider and beer, most notably Magners, Bulmers, and Tennant's.
- Almost all their business is in the British Isles (Great Britain and the island of Ireland), esp the island of Ireland and Scotland.
- The stock price has declined quite a bit over the past few years as its cider brands have lost market share and suffered from increased competition and have failed to break out of the Ireland/Scotland markets. It bottomed out recently at E2.60. Before the Conviviality Direct deal, they had taken several steps to grow sales, including a deal with AB InBev to distribute their ciders in Great Britain. At E2.60, the stock traded at about 12x unlevered FCF (before the Conviviality Direct deal).
- I will not recount every detail, but I encourage all to read the RNS releases starting in March 2018. The level of incompetency is startling. The result was that Conviviality went from a £800mm TEV company (with less than £200mm debt) to a £100mm TEV company (with the equity wiped out) in one week!
- On March 8, 2018, Conviviality announced they would fall short of EBITDA guidance by about 20%. Half of the shortfall was due to a spreadsheet error! The other half was due to margin pressure in the Direct business. They clarified this statement with a subsequent statement on March 13, 2018.
- On March 14, 2018, the company announced that they owed £30mm in taxes in two weeks, and that they were unaware of this until now. Further, they had no cash available to pay the tax.
- Rumors were swirling in the UK spirits industry with the March 8 announcement, and all hell broke loose with the March 14 announcement. Suppliers refused to deliver to Conviviality, and of course, customers forgot to pay their bills: the dreaded death spiral of any distributor. Many small suppliers would certainly have had to go under if their accounts receivable from Conviviality was worthless.
- The CEO (Diana Hunter) was terminated on March 19.
- The attempted equity raise of £125mm was un-successful and Conviviality filed for Administration. Even before the Administrators had been assigned, C&C agreed to purchase the Direct business on April 4, 2018 for £1. And the creditors, owed about £180mm, agreed to take a haircut and only £102mm of debt was transferred with the sale. (Note: technically, they did not agree to a haircut as the remaining debt remained with the parent company in Admin and they might get some of the proceeds from the sale of the retail business).
- And there is one more key detail. AB InBev provided “financial support” to the deal. This was not spelled out in the regulatory filings, but several articles and industry insiders agree that AB InBev has formally guaranteed all trade payables from both before and after the Administration filing. I have not been able to determine how long this guarantee will run, but clearly AB InBev wants C&C to be stable and successful.
- The AB InBev guarantee stopped the death spiral in its tracks. Suddenly, the Conviviality Direct business was more stable than it ever had been. Suppliers would be fully compensated for all past deliveries and would now have a more stable business partner going forward. I have spoken to two industry insiders—one in UK wines and one in UK spirits—and both believe that there will be no significant defections among suppliers. In fact, they would not be surprised if the new Conviviality Direct attracts some new suppliers over time now that it is more stable partner because of its brands EBITDA and because of AB InBev.
- And a similar story on the customer front: they have little incentive to defect to new distributors (and different brands) now that Direct is stronger. And they now must “remember” to pay their bills to Direct now that Direct will be an ongoing business partner.
If my thesis is correct, what is this worth?
Pre-Conviviality Cap Structure:
Shares: 310mm à Mkt Cap = €930mm
Net Debt: €173mm
TEV = €1,103mm
This is from August 31, 2017 balance sheet. FY 2018 ends Feb 2018. They acquired a large group of pubs in H2 FY’18. These are not included in these numbers.
FY 18 EBITA = €93mm
Unlevered FCF = €78mm (14x)
Pro Forma the Conviviality Acquisition
All we added was €117mm of working capital debt. For distributors, I tend to consider true working capital debt outside the TEV but subtract the interest from EBITDA. The reason is that this debt scales with the business.
Before the final death spiral orgy (but including overhead, the spreadsheet error, and margin pressure), the Direct FY ’18 EBITDA was about £43mm. Subtract the working capital interest and apply a 20% tax rate and the result is unlevered FCF of £30mm, or €34mm.
If we add in only this, Unlevered FCF = €112mm (<10x) and note that our pro forma TEV is the same because they paid £1.
Further, I believe the new Conviviality Direct will outperform the old one. Even before the death spiral, Conviviality Direct had lost control of its AR and its margins. It was doing bad deals to grow at any cost. DSO was expanding and causing working capital issues. The fact is that Conviviality Direct needs to fire a few customers and let some other customers walk if margins are too low. This may cause a few quarters of short-term under-performance, but in the long run, it will result in higher margins and better cash flow.
The other obvious big upside here is the increased distribution of C&C brands by Conviviality Direct. The C&C Group press release and conference call emphasized this point: “provides direct access to an incremental c.23,000 on-trade customers . . . “ and “enhance access for C&C’s cider and super-premium brands across the on and off-trade in the UK.” I have struggled with how to quantify this except to say that the opportunity is large. It seems plausible that they go from having stagnant cider/beer brands to a consistent HSD/LDD growth given the opportunity in Great Britain cider alone.
Further, the relationship with AB InBev is intriguing. Can AB InBev enable C&C brands to break out of the British Isles? Would C&C eventually be an acquisition target?
Finally, they are now positioned to make small brand acquisitions that they can then blow out via their distributor. The strategy that Coca-Cola has used so successfully.
I struggle with the correct value, but I believe that both the brands and the distributor are worth >15x if the thesis proves correct. This would get us a +60% in the equity.
1) Proving that the Direct business has stabilized (6 months)
2) Showing growth in brands due to owning distribution (12 months)
|Subject||Thanks for the write-up...|
|Entry||04/14/2018 03:51 PM|
...and you beat me to it actually!
We had been a shareholder of C&C actually for a few weeks before the deal was announced as we had been following the stock for some time and felt it had just become too cheap in the 2.6-2.8 range.
We fully agree with your analysis that this is a fantastic deal and that they are increasing their FCF generation substantially for a very low cost. An important factor that I would like to add is that when Conviviality bought these assets a few years ago, C&C had done extensive due diligence but didn't end up buying it as they felt Conviviality overpaid at the time. The point is that this is an asset they know very well rather than a random buy having spent 5 min on it. Obviously - the price is a fraction fo the c. 250mm that Conviviality had paid.
We are also struggling with quantifying the 'synergies' on their core beer / cider business, but also share your view that this should help them return to organic growth after a few years of decline. Other salient points that made us feel that they could have turned the organic growth curve even absent that deal are:
- In Ireland, where their dominant cider business has been under attack by Heineken, we believe that price has started to turn and that Heineken is ramping down their commercial intensity
- In Scotland, the minimum usage price that is starting now (basically increasing the price of cheap alcohool) should increase their market share given they are in the high-end and ultimately should be benficial to their earnings
- In England, they had signed a distribution deal with AB-Inbev last year which is starting to show fruits. This is compounded by the Admiral pubs they bought, which is not only probably a good financial deal, but also will generate sales synergies
A few other factors that we liked are that the management team owns a lot of shares and is very incentivized to the share price performing well, and that more generally the shareholder base is as solid as I have ever seen - a few large quality holders who are really doing all they can to create value for shareholders here.
Finally - we believe that this asset could easily be 'snapped' by one of the beer majors. AB-Inbev is the obvious suspect, but Molson-Corrs and Asahi are possibilities, and even Heineken frankly. The relative valuation is very cheap and any of these would generate substantial synerges. A deal - whilst not our base case - would generate probably > 40-50% upside in one go.
All together, many ways to win here for a company that is broadly under-followed / under-covered, is very cheap, has just landed an outlandish deal, and is a very likely consolidation target.
|Subject||Re: Thanks for the write-up...|
|Entry||04/16/2018 10:28 AM|
I was not aware of Heineken ramping down intensity. That would be great if true. Recover some margin and stabilize market share.
On your other points, I concur.
Thanks for the feedback.
|Subject||Re: Re: Thanks for the write-up...|
|Entry||04/16/2018 09:11 PM|
all good questions:
2) Agree that wine/spirits different from beer/cider (I believe they call this LAD--Long Alcoholic Drinks). In fact, the spirits distribution is distinct from wines as well. And from the limited comments from C&C, it appears as though the Conviviality Direct biz will be run separately from the LAD distribution. But the key is that there is a common buyer at most of their on-trade customers. Some larger customers would have a different contact for wine/spirits versus LAD, but most are going to have a single contact. And so they have a direct cross-selling opportunity. They have been explicit about this opportunity, but I think your skepticism is warranted. The good news is that I do not think any of this is priced in and as you say, it cannot be a negative.
3) I have no defense of that acquisition and am getting up to speed on C&C mgmt. I like the way they talk about FCF, but another such acquisition would destroy much of the upside here.
4) I agree with you that due to very close partnership with AB InBev, tough to get acquired by others. alemagou had suggested otherwise. I did not think about anti-trust, and I think you have a good point with respect to AB InBev. I think there are other ways relationship with AB InBev can help C&C. I also agree that getting acquired was a big part of C&C story and why stock has dropped as takeout looked less and less likely. I think the takeout premium had pretty much left the stock when it was trading at 2.60. I do not think getting taken out by a major player is part of the thesis.
|Subject||Re: Re: Thanks for the write-up...|
|Entry||04/17/2018 06:30 AM|
on my end:
1) we're hearing that heineken has gone more for the urban pubs which are easier to access than the non-urban ones and so to some extent the easy wins are behind us for HEI. there is also the fact that Heineken needs to consider profitability and it's all good to discount product heavily to sell it but at some point they also want to make money. it seems that pricing is creeping up again in ireland from what we're told. i am always a bit cautious on these channel checks as it seems that everyone has a different views or hears something else and we don't have the resources to interview 100 pub owners say but i would say that the recnet 'noise' has been more positive although would handicap that thought
2) i have not baked in any synergies personally nor from the admiral deal, but the general point is that one of the issues with C*C is that the growth had been negative in england. now they have the new ABI deal, the Admiral deal and this - put it all together and you kinda hope the organic growth picks up. ultimately - declining vs. growing businesses have different multiples. obviously - if organic growth declines despite all this - not a good signal but i would think we will see growth now
3) I always find it very difficult to judge capital allocation on a very low sample base (in this case 3 or 4 deals). I'm in the business of investing and make 15 investments a year or so and have been doing this for a (too long) time and over those years you should be able to judge me as an investor. the point is that the fact that woodchuck was a bad deal doesn't mean MCB will be nor should there be any read-across. My simple view on MCB is that the circumstances are such taht the deal came out at a fantastic price and that C&C was ideally placed to snap it (smaller than some of the other brewers and knew the asset better so could be mroe reactive) - that is usually a very good sign to identify a bargain deal although as you say the jury is still out and they will need to fix it very quickly
4) Antitrust: in ireland they look at beer + cider as one market (long drink), in the UK they look at these markets separately which makes antitrust easier in England. I note the assets could also be separated to some degree. The UK is generally a very competitive market - in Ireland they are getting killed atm for instance. Arguably scotland is a dominant position but that would be true for whomever owns the asset. I do think it's a take-out target yes and i do not think antitrust will kill that deal (when you see that deals like monsanto or essilor / luxottica are being approved these days i strongly think C&C is of another league)
|Subject||Seeking Alpha Article|
|Entry||04/22/2018 08:31 PM|
Very similar thesis. Lots of good details.
|Entry||01/16/2019 11:40 AM|
Not sure if anyone following, but:
The latest trading update confirms that the original thesis is on track and de-risked from the write-up. But the stock up only +7%. The Conviviality Direct business they bought for a pound has stabilized and is fully functional. Their brands have also stabilized and showed some growth. We will find out if there are any revenue synergies from the Direct biz and the brands in 2019. But these rev synergies would be the cherry on top. This stock worth > 4 GBP without it.