ANALYSIS: C&C, the company behind leading brands such as Bulmers, Tayto, Ballygowan and Club Orange, will come to the Irish and London stock markets with some trepidation next month.
It is the first flotation on the Irish market since Eircom and is happening as global stock markets are volatile and prone to sharp downward swings amidst economic uncertainty.
These conditions have already had an impact on the impending flotation. After meeting large institutional investors in Ireland and Britain over the past couple of weeks, C&C has been forced to revise its offer price, reducing it by some 30 per cent, to help to ensure the flotation succeeds.
It now says the shares will be offered at between €2.60 and €3.60.
The professional investors will have weighed up C&C as an investment proposition, comparing the potential for gains with similar stocks. The view in the market is that the fund managers have told the company they will only be buyers if the shares are valued at or below €3 when they begin trading on July 15th.
The institutions may have done some favours for ordinary shareholders by driving down the price, offering a greater potential for investment gains even in these uncertain market conditions.
At €3 a share, C&C would be trading on a price-to-earnings multiple of about 10. This means that the company is expected to take 10 years to get back the share price through its earnings. A high multiple indicates that the company would have to produce very strong growth in earnings in the future to justify its current share price.
A price-to-earnings multiple of about 10 is considered to be very acceptable and is slightly below the 12 to 13.5 earnings multiple attached to other stocks in the same business. Bigger companies in the same sector, such as Diageo, trade on a multiple of around 16, so it offers relatively good value at that price.
Another factor that warrants consideration is the potential yield for shareholders from the dividend payment. C&C says it intends to embrace a progressive dividend policy. In its first full year of trading it expects the dividend to be covered at least 2.5 times by earnings.
Based on an offer price in the middle of the indicative range, this would suggest a dividend yield of about 3.5 per cent. C&C said it was confident it could produce a reasonable year-on-year increase in the dividend that would be attractive to investors.
The firm's management and the venture capital company, BC Partners, will retain 51.4 per cent of C&C. BC Partners has undertaken not to sell any additional shares for six months after the flotation and there may be concerns that this may create an overhang in the market and depress the share price.
Other factors to be considered are the firm's strong track record in terms of delivering enhanced profits. The business is also easy to understand given the dominance of brands such as Bulmers, which is the biggest generator of profits for C&C.
The bulk of its earnings are made in Ireland, although the group suggests it will have greater flexibility to expand abroad, post-flotation. It has suggested there are still very strong demographics to support its continued growth here. It will use most of the flotation proceeds to pay down some of its debts, although it will still be saddled with debts of about €500 million. Analysts suggest this would not prevent the company from making acquisitions.
