An AG Barr spokeswoman told FoodManufacture.co.uk: “We are not commenting on this,” after a report in The Sunday Times claimed the soft drinks firm was preparing a bid with private equity firms Blackstone and Lion Capital.
A spokeswoman for GSK confirmed that the firm was “moving through the process” to sell Lucozade and Ribena but would neither confirm nor deny interest from AG Barr.
City analysts have welcomed the prospect of a deal but one warned that AG Barr should not lay itself open to accusation of acting in haste after the collapse of merger talks with Britvic.
“It looks a little bit quick,” David Cumming, head of UK equities at Standard Life Investments told BBC Radio4’s Today programme. “They have to be careful they don’t send a signal that the growth options from the existing drinks franchises – things like Irn Bru and Rubicon – is running out of steam.”
But AG Barr had “a talented management team” and it made sense “for a focused drinks company to look at something like Ribena rather than Glaxo, which is moving its consumers businesses towards health.”
‘Talented management team’
While the deal was logical, AG Barr had to get the right price and to structure the deal with private equity.
Panmure Gordon said the acquisition would broaden AG Barr’s portfolio and, with its acquisition of the Lucozade brand, offer the opportunity to access export markets and the sports drink category.
Its analyst Damian McNeela noted that the implied valuation range of £1bn to £1.2bn for the brands suggested it made sense for AG Barr to team up with private equity houses.
He based the valuation on the combined sales of Lucozade and Ribena being £600M and an industry average earnings before interest, tax, depreciation and amortisation (EBITDA) margin of about 16% or £96M.
The most likely form of deal would be a joint venture with private equity (PE), said McNeela. “In this scenario AG Barr could take out a call option to buy PE out at some point in the future.
“Secondly, private equity could take a stake in Barr injecting the required equity into Barr for them to bid with.”
Cost savings would be a driving force behind the deal. “We think cost savings could be quite significant given the scope to close plants and bring production into its new Milton Keynes site,” said McNeela.
AG Barr sales are currently trading 19 x price/earnings ratio and 11.9 x earnings value/EBITDA, which represents a premium to its international soft drinks peers.
But the structure of the deal would be crucial in determining the merits for equity investors, said McNeela.
Panmure Gordon retained its ‘hold’ recommendation on AG Barr stock.
Meanwhile, Chinese police have accused GSK of behaving like a criminal “godfather” in China, paying about £323M (3bn yuan) in bribes since 2007, according to a report in The Telegraph.
A spokeswoman for the firm told FoodManufacture.co.uk that an internal investigation had revealed no evidence to support the allegations.
GSK took the allegations very seriously and was co-operating with the authorities, she added.