C&C, the Clonmel-based maker of Bulmers cider, appears to have a job on its hands convincing the market that it should be in the pub business.
The company has put forward six reasons why it thinks a Spirit deal, which would set it back about €1 billion if it were to succeed, makes sense.
Firstly, it says there will be cost savings, which would presumably be minimum given the lack of operational overlap. It also mentions improved “strategic options” for the combined group, which hints that a combined brewer-pub company could be attractive to big foreign brewers down the line. From Asia, perhaps?
It also argues that a deal would optimise the balance sheet and cashflows of the two.
The fourth reason it puts forward is that the 1,200 Spirit pubs gives it a ready-made distribution network for its brands, such as Bulmers and Blackthorn. This is perhaps its strongest card to play.
On the marketing side – and C&C can be a marketing genius at times – it reckons the pubs give it a bigger opportunity to build its brands in the posher areas around London.
The final reason is that it would give it better buying power. To buy what, though, would be the question. Pint glasses?
Analysts are so far unconvinced.
Goodbody analyst Liam Igoe yesterday produced an extensive note pouring cold water on the proposed deal, which in any event will face strong competition from Greene King, which has already had a Spirit bid as good as accepted.
Igoe says a combination of Spirit and C&C might add an extra €30 million in extra sales of its own brands, and “upwards of €15 million” in profits.
“On the basis of the little information available to us at this time, this not look adequate to generate” enough money to pay the cost of capital for the deal, he says.
The main reason the markets are spooked by a C&C bid for Spirit is that they now have no idea what is its medium term strategy. Up until recently, it was focused on building its cider business internationally.
Now, C&C is pushing a vertically integrated model in its core market of the United Kingdom, a totally different bag of apples.
Igoe also predicts in his note that C&C may choose to sell its US business, the Vermont Hard Cider Company, walking away from a division that cost it a chunky $305 million just two years ago.
The company will have some explaining to do at its interim results briefing on Wednesday.