Tempus29 May 2020 07:31
Brewery deal is worth raising glass to
Miles Costello
Friday May 29 2020, 12.00am, The Times
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Investors and analysts have been toasting Marston’s deal with Carlsberg. Shares in the FTSE 250 pubs and brewery group doubled in price on the day the agreement was made public at the end of last week, and have lost little of their fizz over the subsequent days. The follow-ups from the analysts that cover the stock have been overwhelmingly enthusiastic.
It’s not difficult to see why. While the partnership dims Marston’s involvement in brewing ales and beers, and sparked howls of outrage from the ale purists, it has teamed up with a well-regarded player and the terms value its existing operations at a sound multiple of earnings.
The £273 million cash payment Marston’s receives means that it can meet its target of cutting its unsustainable £1.4 billion of debts by £200 million, and early. That the group’s called time on dividend payments this year has been forgiven in the light of the current crisis.
Marston’s was founded in Burton-upon-Trent in 1834 and as well as brewing Pedigree, it operates 1,350 pubs. It also has premium outlets including Pitcher & Piano.
The group ran up its debt pile by building up its estate through a series of expensive acquisitions while the pubs sector was consolidating; it has been gradually bringing it down, including by offloading pubs and reducing its capital expenditure.
There are some clear merits to the combination with Carlsberg, the Danish brewer of lagers including Carlsberg itself and San Miguel.
It’s noteworthy that, after the two sides began talks in November and agreed the framework terms in February, they were left almost untouched last week despite the impact of coronavirus. And only£34 million of the agreed payment to Marston’s was deferred, for a year, based on the performance of a small basket of shares, of which it is one.
The valuation of £580 million that it puts on Marston’s brewing business represents an attractive 13 times last year’s earnings before tax and other costs. The group gets a 40 per cent stake in the joint venture, and boardroom involvement, so it can exercise influence in the relationship.
The cost-savings target of £24 million a year looks conservative. With both companies supplying their own and other pubs, supermarkets and shops as well as hotels, bars and restaurants, the opportunities to cut costs look substantial.
With consumer tastes polarising into craft and premium ales on one side and mass market beers and lagers on the other, bringing together both sides makes strategic sense. This deal follows a series of mega-mergers in the sector that led to the creation of brewing giants including Anheuser-Busch Inbev, Constellation Brands and Molson Coors.
The Carlsberg cash should not only reassure Marston’s shareholders about the debt target, but also that the group has the resources to keep going under lockdown restrictions.
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