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ISEQ steady-C and C buys big

Tuesday, October 23 08:56:18

The ISEQ is unchanged this morning at 3,237 as markets are generally up a little or down a little. The exception is Tokyo where the fall in the value of the Yen has produced seven consecutive rises in the index. In Ireland the news this morning, is dominated by C and C's large acquisition in the US and Davy Stockbrokers runs a rule over the deal:

C and C will acquire Vermont Cider Company for $305m, subject to regulatory approval. Vermont is the leading player in the fast-growing US cider market. Vermont is forecast to achieve $15m EBITDA (ex-non-proprietary brands) this year, which implies a 20x multiple. The deal is expected to be immediately accretive. The business will bring leading US cider brands, production assets in the US and a strong national US sales-force and distribution capability. The US management team will stay in place and is further investing in the business.

Net debt to EBITDA goes to 1.0x; there is no impact on C and C's progressive dividend policy; and the transaction is likely to complete by the end of the financial year.

H1 results were in line overall. H1 operating profit of E65.6m (-6pc constant currency) compared to the Davy forecast of E64m. FY guidance was confirmed at the lower end of the guidance range of E112-118m (Davy FY: E112m). There was a weak GB and ROI cider performance with intense competition in UK cider and significant deflation in Ireland. Tennent's was very strong as was International (+33pc volume growth).

Cash flow was a bit weaker than we thought (E22.2m FCF generated) with slightly higher working capital drag and further investment in trade loans. 50-60pc of EBITDA is to be transformed to FCF. There was a currency benefit of E2.4m. ROI net revenue was down 12.3pc, and ROI operating profit was down 20pc. The negative channel shift to the off-trade was the deflationary driver. Volume declined 3.2pc, but price/mix was down 9pc. Beer volume in Ireland was up 40pc. UK cider net revenue was down 21pc (volume -18.6pc); within that, Magners was down 17.4pc. Operating profit declined 15.7pc. The off-trade was weak in the first four months of the financial year, albeit there was some improvement in the last two months. C and C cut back on some A and P in GB and reinvested primarily in trade lending.

The Tennent's division was the standout performer. Operating profit was up 20pc and net revenue rose 7.3pc (13.6pc price/mix). Operating margin for Tennent's in H1 was 28pc - a remarkable achievement in a UK beer market context. In the International division, volume rose 53pc (beer and cider). Cider was up 32.7pc in volume and operating profit was up 10pc. We suspect there was some front loading of investment in the export cider business.

DAVY VIEW: The H1 results will be overshadowed by the acquisition of the Vermont Cider Company. The US cider market is exhibiting very strong growth (80pc in September yoy). With this deal, C and C now has a strong infrastructure to capture growth in this nascent market. This deal will transform the geographical exposure of the business and will lift the growth rate of the group. C and C's rating is also likely to expand according to Davy Stockbrokers.