Why Carlsberg has a thirst for Britvic

The roll-call of UK-listed companies to have attracted foreign takeover approaches this year is a long and distinguished one.

It includes Anglo American, the mining giant; International Distribution Services, the parent of Royal Mail; Darktrace, one of the world’s most exciting cyber security specialists and DS Smith, the FTSE-100 packaging company which is Europe’s largest cardboard and paper recycler.

To that list was this morning added Britvic, the soft drinks company behind much-loved brands such as Robinsons, J2O, Fruit Shoot, Tango, Aqua Libra, Ballygowan mineral water and R White’s lemonade, and which is also the bottler for PepsiCo in Great Britain.

It confirmed this morning it has received two takeover approaches from the Danish brewing giant Carlsberg this month.

The first valued it at £2.99bn and was rejected. It said Carlsberg, the world’s third largest brewer after US giant AB InBev and Dutch group Heineken, then came back with a second approach valuing it at £3.1bn.

It said that, too, had been rejected because it “significantly undervalues Britvic, and its current and future prospects”.

Shares of Britvic have soared by 10% on the news but, despite having touched 1150p today, are still trading at a discount to the 1250p offered by Carlsberg.

For its part, Carlsberg said today: “Carlsberg believes that the potential transaction would enable it to capture appealing long-term growth opportunities from Britvic’s comprehensive portfolio of leading brands in an attractive segment of the beverage market where Carlsberg already has a strong track record.”

Share price irritation

The approach for Britvic comes as no surprise. The company’s share price performance has made it vulnerable.

The shares, despite a strong rally since the first week of April, were changing hands at just 955p each at one point on Thursday and, until news of Carlsberg’s approach was made public, had yet to recapture the levels seen before the pandemic.

That has enabled Carlsberg – famous for its old advertising tagline “Probably the best lager in the world” – to pounce.

Britvic’s management has been irritated by its share price performance for many years and particularly by comparisons with Fever Tree, the up-market maker of tonic water and mixers, which became something of a stock market darling after its stock market flotation in 2014.

Fever Tree’s shares more than doubled over subsequent years and at one point in July 2018 were valued at £4.5bn.

Today, Fever Tree is valued at £1.2bn, just under half of Britvic’s £2.54bn, despite Britvic’s most recent full year sales being five times those of its rival.

That partly reflects some of the trading conditions both have navigated over the last decade.

While Fever Tree was able to benefit – until inflation set in – from a move towards “premiumisation” in alcoholic drinks, Britvic had to face the headwinds of a sugar tax in the UK, its biggest market.

This forced it to take out full sugar ranges of top-selling brands such as Robinsons squash and Fruit Shoot as it recalibrated to become a no-sugar business.

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It also had to grapple with changing consumer tastes which it has done by, for example, buying the business that is now Aqua Libra; Plenish, the healthy juices and shots brand and Jimmy’s Iced Coffee, the fast-growing “ready to drink” iced coffee brand.

These developments, over time, appeared to be winning over investors – as shown by the rally in Britvic shares over the last couple of months.

That was also helped by crowd-pleasing measures such as three share buy-back programmes in as many years.

Simon Litherland, the chief executive, has struck an increasingly confident note in recent months and, at the half year results in May, could point to solid growth in sales volumes despite the company having passed on some cost increases to consumers.

That possibly explains why Carlsberg has moved now. The price it is offering is not, however, especially generous at just over 13 times Britvic’s earnings before interest, taxation and accounting charges.

The Danish giant, though, may be wary of going higher.

Carlsberg, which has been brewing in Northampton since 1973 and which through its joint venture with Marston’s owns top-selling cask ales such as Hobgoblin, Pedigree, Wainwright, Tetley and Bombardier, was scalded by the last major takeover it did in the UK.

In March 2008, it teamed up with Heineken to pay £7.8bn for Scottish & Newcastle, the last big multi-national British brewer.

The deal – struck just as the global financial crisis was getting under way – saw both sides overpay.

More critically for Carlsberg, the main attraction of the acquisition was that it won full control of Russia’s biggest brewing company, Baltika.

It seemed a fantastic deal at the time given Russia’s colossal – and growing – beer consumption. But Carlsberg had to give up ownership of the business after Russia’s invasion of Ukraine.

Iconic brands

Were it to succeed in snaring Britvic, though, it would be acquiring a business with immense heritage. Britvic dates back to a mineral water supplier of 1784 – but the Britvic name itself dates back to the launch of The British Vitamin Products Company in the 1930s.

Among the most iconic of Britvic’s brands is R White’s, which dates back to 1845 – but which for millions of Britons of a certain age, remains beloved for its iconic 1973 TV advertisement.

It featured a man in his pyjamas, played by the actor Julian Chagrin, who creeps downstairs in the dead of the night to drink his favourite lemonade, only to be caught by his wife, played by the actress Harriet Philpin.

At the centre of the advert was a song, Secret Lemonade Drinker, which was composed by the late Rod Allen and sung by Ross MacManus, father of the rock star Declan MacManus, better known as Elvis Costello – who provided backing vocals.

The award-winning advert ran for nine years and was later remade with, among others, tennis superstar John McEnroe, children’s TV character Mr Benn and comedian Ronnie Corbett making guest appearances as the ‘wife’.

Chagrin – by now sporting a pony-tail – and Philpin reunited in 2012 to make an advert for R White’s lollies along similar lines.

A takeover by Carlsberg would, ironically, reunite Britvic with one of its former owners.

The company was, for many years, owned by three major UK brewers – Bass, Whitbread and Allied Lyons which, in 1992, merged its brewing arm with Carlsberg’s British business. The trio owned Britvic until November 2005 when it was floated on the stock market.

Nor is Britvic a stranger to takeover talk.

For many years, it was assumed it would be acquired by PepsiCo, due to the pair’s long-standing relationship.

It was also assumed that Pepsi, whose brands such as 7UP and Rockstar Energy are exclusively distributed in the UK by Britvic, would always block any bid for the business.

But PepsiCo sold its remaining and long-held 4.5% stake in Britvic in 2017.

Such is the importance and value of its relationship with Britvic, though, that Carlsberg would be wise to obtain Pepsi’s blessing before going ahead with a firm offer. Probably.