Cott took another surprise step in its move away from beleaguered biz of selling private-label CSDs to big-box stores, this time with definitive deal to acquire foodservice-oriented coffee and tea giant S&D for $355 mil. Move adds $550 mil in revenues from specialist in coffee, tea and liquid extracts that's deeply entrenched in foodservice, restaurant and convenience channels. Deal's anticipated to close quickly, in Q3, with S&D ceo Ron Hinson and his senior team signed to stay on thru end of 2019.
<br><br>Since Jerry Fowden stepped up to Cott ceo job in 09, his overall aim has been to move co away from boom-and-bust cycles of private-label bev biz into "more predictable and dependable" biz profile that garners share value more in line with CPG and service industry peers, per Jerry on investor call this morning. Even as he worked to diversify private-label mix to tilt more toward sparkling waters, iced teas and other growth segments, COT beefed up contract mfg biz and other activities that might shelter it from swings in profitability and demand of private-label before taking radical step nearly 2 years ago to acquire DS Services, giant home- and office-delivery (HOD) water player that seemed sharp divergence from Cott's core skill set. Despite some integration hitches, DS has proved to be growth engine, scoring record 50K net new customer additions in past qtr, and COT has augmented it with modest "tuck-in" acquisitions of various local and regional players before taking plunge on buying biggest HOD player in Europe, Eden Springs, via deal that closed this past qtr. Deals progressively lessened Cott's reliance on what Fowden terms its "Achilles heel," big box retailers, channel where aggressive promos by branded CSD players can decimate private-label biz at drop of a hat.
<br><br>For now, tho, the big spending push is over. Toronto- and Tampa, Fla-based co now will focus on paying down debt incurred in S&D deal, so it's "not looking at any other mid- to large-scale acquisitions as we look out over the next year or 2," Fowden assured listeners today.
<br><br>On today's call and in ancillary materials issued about deal, COT took pains to spell out how S&D deal continues on path away from what not long ago was core biz of making private-label CSDs for big retailers. Private-label now is just 36% of revenues, 28% of EBITDA, COT brass noted. CSDs are 16% of revs, 12% of EBITDA - smaller than either the HOD or coffee segments will be. And with S&D in fold, over 65% of EBITDA will be generated by better-for-you items, vs 21% in 2014, before DS Services and other deals. S&D deal augments Cott position in coffee segment that's been boosted by innovative coffee-based bevs and cold-brewed coffee, even as tea biz should benefit from consumers' growing health awareness and similar shift to premium as in coffee. Note that while DS already plays in coffee, much of biz is in challenging brew-basket office coffee services, so S&D will offer welcome diversity as well as fuller integration. "Most attractive area of cross pollination," Fowden said, "is tremendous capability in roasting and grinding that can be used to supply products that DS Services uses with its customers - higher-quality, vertically integrated, and a broader range of items."
<br><br>Co is projecting that it will capture $12 mil in synergies over next 4 years, but Fowden indicated figure could prove significantly higher given overlapping coffee brewer refurbishment centers, depots, distribution routes and other redundancies. S&D, based in Concord, NC, brings to mix 2 dedicated coffee plants with annual capacity of 130-150 mil lbs; tea plant with 40-50 mil lbs of capacity and extract/ingredient plant.
<br><br><b><i>Dropping Private-Label Biz Altogether Is Not Out of Question</i></b> Might Cott dump its private-label biz altogether? Noting there's been considerable market chatter about that prospect, analyst asked point-blank whether Cott is considering exiting any "verticals." Fowden answered that everything's on table when co undertakes its annual strategic reviews, but reminded listeners that PL biz is highly attractive on basis of cash flow generation. "We want to be very clear and mindful that if we look at any alternatives it has to generate value equal to or above the cash flow business that we've got," he emphasized.
<br><br><b><i>Stable 2d Qtr</i></b> For 2d qtr, Cott revenues slipped 2% to $765 mil on currency-neutral basis, with growth in DS Services partly offset by mix shift toward contract mfg, which brings in similar income on lower revenue line. Net income widened to $7 mil from $2 mil. In N Amer, volume rose 4% thanks to 10% growth in sparkling water and mixers and 15% growth in contract mfg, partly offset by declines in CSDs and shelf-stable juices. With focus of call on S&D deal, Fowden didn't offer usual color on promo activities by big bevcos at retail.