Downturn prompts demergers and disposals

Despite the prime minister’s previous claims to have abolished the boom/bust cycle, it remains in rude (and painful) health. As indeed, does the equally well-established cyclical trend for companies to embark on mergers and acquisitions when corporate strategists are …

…  in bullish mood and then revert to selling peripheral businesses and brands during the subsequent downturn when cash conservation becomes the prime objective.

Nowhere is this more evident than in the drinks sector. For instance, on Christmas Eve Cadbury agreed to sell Schweppes Beverages, its Australian drinks arm, for £550m to Asahi, the Japanese brewer. Coca-Cola has yet to decide whether to exercise a right to first refusal over the business and has until March to do so, but the sale marks Cadbury’s final exit from the drinks sector following the demerger of its Dr Pepper and Snapple arm last spring.

Meanwhile, Constellation Brands has agreed to sell its “value spirits” business to New Orleans-based Sazerac Company for about $334 million. The deal includes 40 brands including Barton, Skol, Mr. Boston, Fleischmann’s, 99 schnapps, di Amore, Chi-Chi’s pre-mixed cocktails and Montezuma tequila. The total volume for brands being sold was more than 10 million cases for the fiscal year 2008, with net sales totalling approximately $200 million.

The deal is notable, not least because Constellation is providing $60m in medium-term financing to the purchaser to facilitate the sale and will take an $11m profits hit this year in order to streamline its higher margin spirits interests. The entire sale proceeds will be used to cut Constellation’s debts.

The industry is also awaiting Fosters’ postponed decision about the future of its troubled wines arm, which includes brands such as Penfolds, Beringer and Lindemans. It announced a complete review of operations last year when chief executive Trevor O’Hoy fell on his sword and speculation continues that Fosters will seek to separate its wine and beer interests through either selling its underperforming wines division or even a demerger. The idea that it might seek to sell just its bulk wine interests to concentrate on premium brands is thought less probable largely because of their unattractiveness without the internationally-known labels. Indeed, observers believe that October’s delay in announcing the outcome of the strategy review could be due to lack of interest from potential buyers for the wines arm, especially given the continuing glut of Australian wines and the heightened difficulties in raising acquisition finance during the global credit crunch.

Meanwhile, observers believe Pernod Ricard will soon announce the sale of some peripheral brands. In December, the French group agreed to sell the Gronstedts Cognac, Star Gin, Red Port and Dry Anis brands to Norway’s Arcus Gruppen. These sales were forced on Pernod Ricard by Brussels as part of its approving the takeover of Vin & Sprit and the Absolut vodka brand, but although no public announcement has been made about the price achieved, it is unlikely to be in the region of the €1 billion new chief executive Pierre Pringuet has promised to achieve from disposals to reduce debt. Speculation continues that Plymouth Gin will be sold to Campari, which has expressed a formal interest in the brand. 

Finance on Friday, 16.01.09