C&C drama shows strong brands carry no guarantee

Observer: Owning brands is not a unique selling proposition, writes Mary Lambkin.

The failure of C&C to float earlier this week brought the topic of brands and their management into focus and raised questions that are equally relevant for many firms. Mr Maurice Pratt, C&C chief executive, said in an interview that the failed flotation cost around €3 million and it seems likely a considerable part of this was spent on an intensive advertising campaign. It was almost impossible to avoid the firm's newspaper advertising for at least a month before the proposed float and this was supplemented by a substantial radio advertising campaign nearer to the closing date.

In retrospect, its punchline "C&C - The Brand Masters" sounds somewhat arrogant and ill-chosen because it does not allow for the possibility of defeat and sounds rather hollow and foolish in the event.

It is understandable, however, that it would have chosen this line because the term "brand masters" is fashionable in marketing circles, reflecting a belief that brands are a valuable asset and those who own them hold considerable market power, which follows through to the bottom line and confers superior profitability.

How to reflect this in balance sheets has occupied the attentions of the accounting and marketing professions for a decade or so, without any definite resolution. The only real answer regarding brands owned by a business for a long time, such as C&C's Club Orange, is that it was worth what someone was willing to pay for it.

This raises the second situation: how to treat acquisitions. Typically a firm pays a premium well above book value to acquire a business with established brands. This premium was treated as "goodwill" in the balance sheet and was matched by long-term debt or equity that was raised to pay for the acquisition.

This is the situation faced by C&C. Its main portfolio of brands was acquired from Allied Domecq in a management buyout in 1999 funded by BC Investment Partners for €734 million. The Tayto firm was acquired in the same year for €68 million to add another set of brands. These prices represented a large premium on net asset value and the end result is that C&C now carries €750 million of debt.

The positive view of this is that the large debt burden is backed by strong brand collateral and is therefore secure and justified. The negative view says the firm is over-geared and no brands could yield a sufficient return to pay back this debt in the short or even medium term. In fact, this goodwill element is being amortised over 20 years in line with international accounting practice.

This was the role of the flotation - to raise equity to replace long-term debt and to enable the debt providers to get out of the company and recoup their investment, preferably with a healthy profit. This is perfectly logical from their point of view. But is it a good reason for investors, whether institutions or individuals, to hand over their money?

The volatility of international stock markets has received most of the blame for the C&C debacle. Indeed, it would be difficult to deny that the environment is turbulent. But isn't there also a possibility the market failed to be convinced that shares in this company could yield an acceptable return in the near term through its own trading performance?

The main lesson to be learned is that ownership of brands is not in itself a "unique selling proposition" sufficient to persuade investors to support a flotation. What must be demonstrated convincingly is that the financial performance derived from those brands will be sufficiently large and sustainable to yield a better return than other financial options.

This is a marketing as much as a financial task and, given that C&C's business success is based primarily on the marketing of consumer brands, one would expect it to show the same flair in marketing its share flotation. In fact, it might be argued it handled its own marketing campaign very badly.

First, its advertising seemed directed mainly at the mass market even though it was stated that private investors were expected to comprise only a very small proportion of its investors.

Second, the publicity generated by this float was harmful and shows little evidence of professional public relations management. Most of the coverage centred on the large pay packages of the senior executives with bonuses and options e.t.c. All of this smacks of greed and suggests the main motivation for the flotation was to enable the executives to make a fortune.

It may be difficult to prevent the media focusing on this kind of information, particularly where it is publicly available in the prospectus document, but one would think the company would try very hard to counteract it by explaining its logic and by demonstrating that the shareholder would share the benefits equally.

The only upside of all this is that C&C remains a very solid company, with annual sales of €750 million from a range of strong brands and a solid profit record over many years. We have few enough strong indigenous companies in the Republic and we should cherish those we have and congratulate the managers who have built them up.

In C&C's case, it has shown remarkable initiative in finding and acquiring undervalued brands and developing them through its own efforts.

To build a business in this way, it has had to leverage its finances through borrowing, which has left it under-capitalised. A share flotation to replace debt by equity was the obvious next step to create a stronger base for future development. This remains the challenge going forward but it will have to go back to the drawing board to see how to achieve it.

Mary Lambkin is professor of marketing at the Smurfit School of Business, UCD