Can reopening of pubs whip up thirst for £151m C&C share sale?

Like Italy, hovering in sixth place among the bookies to win Euro 2020 in July, Irish cider and beer maker C&C Group is struggling to recapture its glory days of the mid-noughties.

As Italian defender Fabio Cannavaro led his side to World Cup victory in the scorching hot summer of 2006, C&C's Magners cider brand was reinventing a category of drink in the UK that was more associated with two-litre bottles and park benches.

Backed by a slick advertising campaign, Magners sales surged 255 per cent that year, the first time it was sold in England outside of London. It drove a 23 per cent surge in general UK cider sales, to close to 965 million pints.

Media groups, including the BBC, even reported talk of potential apple shortages if demand continued to rise.

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C&C’s share price would more than double to nearly £13 (€15.10) in 2006 in London. It wouldn’t last long.

Deal

Shares in the Irish drinks company plunged over the following two years as the hype around Magners fizzled out and sales declined.

Not even a change in management in 2008, with the arrival of the "dream team" of three former Scottish & Newcastle executives, including Stephen Glancey, on a private equity-style incentive pay deal, could stanch the trend.

It's not as though they weren't active. Underpinned by the cash cow that is C&C's Bulmers business in Ireland, the new team would buy Tennent's Lager in 2009 for £180 million.

It went on the following year to sell the group's spirits and liqueurs business – including the Tullamore Dew and Carolans brands – for €300 million, only to splash out $305 million (€250 million) on the disastrous purchase of US cider group Vermont in 2012. The scale of the value destruction in that deal was crystallised in the eventual sale of the business in March for just $20 million.

At home, Dutch drinks giant Heineken put the squeeze on Bulmers with the launch of its Orchard Thieves brand in 2015, while C&C made another attempt to drive Magners and other brands in the UK with the 2017 purchase of a 47 per cent stake in Admiral Taverns, which at the time owned and operated 845 pubs, mainly in England, for an outlay of €40 million.

Performance

In 2018, C&C added to its Irish distribution business by buying Matthew Clark and Bibendum, the largest independent supplier of beers, wines, spirits, ciders and soft drinks to the UK on-trade drinks sector, from Conviviality, as the latter collapsed under the weight of debt and tax liabilities.

But while C&C maintained decent cash flows over the past decade, underpinning dividends and share buybacks, its share performance can be described as range-bound, at best, over the 10 years before Covid-19 struck.

Figures for the financial year to the end of February, published this week, laid bare the impact of the pandemic on one of the most exposed Irish publicly-quoted companies to repeated lockdowns in the past year.

Net revenue plunged 56 per cent to €736.9 million for the 12 months, as hospitality in Ireland and the UK, which accounted for 80 per cent of pre-Covid business, ground to a virtual standstill.

C&C managed to scrape out a profit in July, August and September as on-trade restrictions were eased. But for the year as a whole, it recorded a record operating loss of almost €60 million – more than twice what the market had feared.

The company moved quickly at the outset of the pandemic in March last year to raise €140 million in the US debt market to shore up its cash levels.

It also negotiated covenant waivers from its existing bank lenders as earnings plunged; availed of more than €26 million of wage supports, mainly from the UK government, as it furloughed two-thirds of its 2,950 employees; scrapped executive bonuses; and secured deferrals on €77.4 million of scheduled tax payments.

Value

However, these have only been sticking plasters for a company that had net debt of €441.9 million, including leases, and a market value of €998 million at the end of February – particularly as Covid restrictions have continued for much longer than expected.

While C&C’s move this week to launch a £151 million rights-issue share sale, which will expand its number of shares by more than a fifth, caught many in the market by surprise, it was inevitable.

How likely was it that C&C’s lenders were going to continue to remain flexible on the covenants front indefinitely, as the outlook remains clouded, without shareholders putting fresh cash in?

C&C is coming relatively late to the stock market for fresh cash, following a flurry of share sales from public companies last year. But its new chief executive, David Forde, has been in situ only since November, nine months after the retirement of Glancey.

The timing of the cash raise is obviously aimed at taking advantage of renewed optimism around hospitality. UK beer gardens and cafes reopened in mid-April and indoor dining started back last week.

On Friday, the Cabinet here approved plans to restart outdoor hospitality on June 7th, with indoor dining set to resume a month later.

Analysts with German investment bank Berenberg are fans of C&C's plan. "Not only can C&C now enjoy loosened covenant amendments until the August 2022 testing period, but it now enters the reopening in a more healthy financial position and, significantly, with greater firepower should it wish to participate in any UK on-trade consolidation," they said, adding that the month-long Euro football championship and the introduction next year of minimum alcohol pricing bode well.

But Forde’s base case is that C&C’s sales will still be only 87 per cent of pre-pandemic levels in the 12 months to February 2023 – with risks to the downside.

Ian Hunter, an analyst with Cantor Fitzgerald Ireland, is more cautious, saying: "With the current focus primarily on shoring up the balance sheet, greater visibility on sustainable post-pandemic business progress will be required before we have confidence in continued momentum in the share price."