FREE KIC - NO. 83 NOVEMBER 12
THE BIG APPLE
C&C recently announced that they have agreed to buy the biggest producer of cider in America for over $300m. Is this money well spent or is this a management team that is desperate to find growth and have ended up paying too much? These are the difficult questions that I am currently asking myself and hope to expand on in this opinion piece. (To further complicate the situation C&C also recently announced that they have agreed to acquire the beverage company M.J. Gleeson)
Before I start looking at the proposed acquisition of the Vermont Hard Cider Company I just want to recap on where C&C was positioned before this was announced.
I have to admit that I was surprised when the Vermont acquisition was announced. I had assumed that Hornsby was going to be their American brand and I had thought that they had the resources to grow it into a major player. I have listened to their analyst presentation to try to understand their logic for buying Vermont. Essentially I can summarise their case as follows:
My problem is that I do not know whether this is an accurate assessment of the situation. Obviously there is no question that the cider market is growing rapidly at the moment but I have no sense as to whether this can be sustained. Secondly I am not sure if the comparison with craft beers makes sense because I have not followed the development of that market. Thirdly I have no idea as to the strength of the Woodchuck brand and finally I have no real sense of how hard it would be to get national distribution for the Hornsby brand.
Not knowing all these things leaves me in a difficult position because I honestly think that even if I devoted significant time to answering these questions I would struggle to get to the point where I could answer them. The only conclusion I can reach is to make sure that I do not make the same mistake as I made in the past where I was too optimistic about potential growth in the UK market (see opinion piece 55). The most important thing I need to do is make sure that I make conservative assumptions.
Using conservative assumptions would suggest that I should assume that the rapid growth does not last and that cider remains a small insignificant niche in the American drinks market and that Vermont does not gain market share. If these assumptions prove accurate there will come a point when analysts will say that C&C overpaid for Vermont but that does not make C&C a sell because of the value in the rest of the business.
For the time being I am going to give C&C the benefit of the doubt but I am nervous because their net cash position has suddenly become a net debt situation and they have acquired a business in a market I do not understand. My margin of safety has been eroded but hopefully this is only temporary and with a bit of luck Woodchuck might turn into an inspired acquisition.
C&C Share Price: