Ireland-based C&C Group has this week been called to examine its business with the intent of sale by one of its minority investors, following a period of shaky corporate governance.

The strategic review was called for by US hedge fund Engine Capital, which owns just under 5% of C&C and wants an examination of the business with the aim of putting it up for sale.

But who might be interested in the beer and cider manufacturer? Is there a buyer for the whole business, or could a split be on the cards?  

C&C's portfolio includes beer brands Tennent’s beer and Five Lamps and cider brands Orchard Pig and Bulmers Irish cider, known internationally as Magners. The group also acquired a wine-distribution arm in 2018, which includes UK wholesaler Matthew Clark and fine-wine merchant Bibendum.

“Perennial underperformer”?

Engine Capital invested in C&C Group four years ago and argued “structural and self-inflicted issues” have led to the “under-performance and valuation discount” of the company.

The letter said C&C had been a “perennial underperformer” and had “failed to create shareholder value over any relevant measurable period”.

“In our view, a sale could deliver returns far superior to the standalone value of the company, especially considering the time value of money and the execution risks of attempting to reverse self-inflicted issues,” Engine Capital said.

At first, C&C declined to comment on the letter but later issued a brief statement which said it welcomed feedback and was focused on creating shareholder value.

A “credibility gap”?

It follows a series of bumps for the group in recent years, including financial mistakes and poorly executed system upgrades.

Last year, C&C experienced “significant challenges” when it undertook the introduction of an Enterprise Resource Planning (ERP) system upgrade for Matthew Clark and Bibendum.

This botched system rollout created a €25m charge on its 2022/2023 fiscal year. The group noted that €10m of that was due to lost customers because of the ERP debacle.

Then, earlier this month, C&C Group announced CEO Patrick McMahon had resigned due to financial mistakes made during his time as CFO.

C&C said it had reviewed its inventory and balance-sheet reconciliations after its board was notified of “discrepancies” earlier this year. While the adjustments total a charge of just €5m ($5.5m) across three financial years, the departure of McMahon was a further public blow.

For the opening six months of this fiscal year, C&C Group returned an operating profit of €30.5m, down 42.8% on the previous year. Net revenue fell 1.2% to €872.5m while adjusted EBITDA fell 33.5% to €45.9m.

The Magners cider maker still reiterated its underlying operating profit guidance of circa €60m ($65m), alongside an intention to return €150m to shareholders over the next three years.

Fintan Ryan, a research analyst at UK and Ireland firm Goodbody Equity Research, tells Just Drinks there's a “credibility gap” C&C will have to navigate.

“In theory, it's a very simple business but the last few years have been more challenging operationally and internally than I think that anyone could have imagined,” he says.

”So, I think there is a bit of a credibility gap that needs to be closed, and they need to execute now the cost savings and drive those margins higher.

“Now that inflation is easing, cost living pressures, you might see less attrition when it comes to the distribution business.”

He is positive about the medium term for the business, however, adding: “If they get a little bit of macro tailwind, as well as the internal works that they seem to have good visibility on, the business on a standalone basis should improve materially over the next two to three years.”

Addressing Engine Capital’s concerns, C&C said its reported “underlying performance” has been in line with its expectations.

The Tennent’s brewer added “progress has been made in returning capital to shareholders” and that “operationally, the key priority is to deliver the substantial actions currently being progressed at pace throughout the business, driving forward both brand and distribution revenue, improving margin, while returning up to €150m ($160.9m) by the end of the fiscal year 2027”.

C&C began that share buyback process this week. The group bought 75,000 ordinary shares at an average price of £16.15 ($20.42) on the London Stock Exchange. It said it plans to complete the purchase of £12.7m (or €15m) in share value before the month's end.

Potential buyers

C&C could struggle to find a buyer due to its location and cider's relatively small presence outside of the UK and Western Europe, according to David Harris, alcoholic beverages research director at GlobalData, Just Drinks' parent. He says there are “likely to be few major buyers” for the company.

In addition, he highlights: ”The major brands are all focusing on expansion into developing areas (LATAM and Africa in particular)... Likewise Tennent’s is exactly the type of beer we see African consumers moving away from.”

So who could be interested in the Dublin-headquartered group? If big players do not want to swallow the whole entity, could it end up being split up?

Harris thinks so. ”I’d say some sort of investment house is the most likely buyer, who could then sell off core brands piecemeal. That probably would represent a good deal for C&C investors though, and while they have seen limited success in recent years, I don’t think they’re anywhere near that sort of kneejerk reaction/panic,” he says.

One industry analyst, who preferred not to be named, tells Just Drinks a company like Denmark’s Royal Unibrew could be swayed by C&C's UK manufacturing and distribution capabilities, but a deal would depend ultimately on price.

Distribution wise in the UK and Ireland, C&C has 11 depots and has just opened a storage facility near Heathrow Airport.

Another name many will be keeping an eye on is Heineken, which coincidentally already has a cider brand in the UK under the name Bulmers (a separate brand to Bulmers Ireland).

“Were Heineken to acquire C&C, my anticipation would be that they would divest the beer portfolio, essentially made up of Tennent’s and Caledonia plus a handful of small Irish brands,” says Kevin Baker, head of global beer and cider research at GlobalData.

“I’m also not sure what the monopoly implications would be of acquiring the Tennent’s brand. AB InBev had to divest the brand following the merger of Anheuser-Busch and InBev,” Baker notes. Anheuser-Busch owned Tennent's before its merger.

A notable jewel in C&Cs portfolio is its Tennent’s larger brand, which has a dominant position in the Scottish market. Last year C&C said it held a 40% share of total on-trade beer sales in Scotland.

However, while acquiring Tennent’s would give a buyer a notable position in the Scottish market, it could be a difficult brand to grow further afield.

Another industry analyst tells Just Drinks Scotland is not a highly attractive growth market and adds: “It's difficult to see how you materially grow market share when you already dominate the market, in a market which is probably flattish.”

Japanese brewer and distiller Asahi could also potentially have an interest in C&C, having established itself in the UK market with its acquisition of UK brewer Fuller’s in 2019.

Cider's sticking point

C&C’s portfolio has few low-and-no brands and some feel its focus on cider could prove a sticking point for buyers.

“C&C’s portfolio is very heavily based in cider, with a spread across apple and flavoured ciders,” David Harris, alcoholic beverages research director at GlobalData, Just Drinks' parent, tells Just Drinks.

“Cider has not seen particularly strong growth in recent years, having seen increased competition from pre-mixed spirits and to a lesser extent the emergence of hard seltzers in West European markets.”

UK cider sales fell in volume terms in 2023, according to UK producer Westons Cider’s annual category report.

The country, which accounts for around a third of total global consumption, purchased just over 695m litres of cider, a 2.62% decrease on 2022.

Harris notes that saturated markets and increasingly health-conscious drinkers mean C&C’s “core concern” should be addressing its flavour range and the low-and-no category to appeal to new, and younger, drinkers. While Tennent’s is performing well in Scotland, meanwhile, it is still seen as an “old-fashioned” lager, he says.

In its letter to C&C, Engine Capital said it suspects the “optimal strategic acquirer” for C&C would be a large company with a global reach that was looking to benefit from UK manufacturing capabilities and would have the means to reduce the group’s general and administrative expenses.

A company that would “benefit from procurement savings, and leverage C&C’s leading distribution businesses to accelerate the growth of its own branded and higher margin products”.

To keep investors happy, C&C may make a show of looking at a sale of the business and could even sell off a few of its low-priority brands. However, the group’s management has remained steadfast in its approach to growing revenue over the next three years and a sale of the company now would be at an undervalued price in its view.

Goodbody’s Ryan says: “From the board and management perspective, I'm sure that they probably prefer to be delivering on the uplift in profit over the next two to three years and then do a strategic review on that much higher base.

“But if somebody is willing to look through the execution of the profit uplift to say, well, I want this asset now. Well, they would have to consider it.”