Establishing a strategic direction and implementing a plan to achieve it is one of the most important functions of a board of directors and the management team of any company.
Of equal importance is ensuring that the strategy is adaptive and responds to changes in the external environment.
For investors, it can be a painful experience to hold shares in companies whose management teams fail to adapt to the competitive landscape in an industry and instead find themselves doubling down on a strategy that has not shown it is working.
A case in point is C&C, a company that can trace its roots back to humble beginnings selling carbonated drinks.
A serial acquirer and subsequent seller of assets, C&C has had exposure to multiple categories of consumable goods, ranging from water to whiskey and from Club Orange to Cider.
Despite holding some very attractive products over the years, C&C has systemically disposed of most of the non-cider related products, exiting product categories that have since generated significant gains for their new owners, specifically the Irish Whiskey, Tullamore Dew, that has become a very big success story.
C&C is now most well-known for Bulmers cider, which experienced a period of supercharged growth just over a decade ago but has since experienced a more challenging operating environment as the supernormal profits gleaned from the apple-based drink drew international competitors into the market in the UK and Ireland, resulting in sharply lower profitability.
Seeking to replicate the success of the cider market in the US, C&C acquired a company called Vermont Hard Cider in 2012, which at the time manufactured the number one domestic US cider. The transaction cost an unpalatable $305m (€267.4m) for a company generating profits of just $10m.
Considering that Vermont Hard Cider had been bought by the management team for just $2.3m after the previous owner decided to exit North America in 2003, C&C clearly overpaid.
Almost immediately, competitors entered the US cider market and C&C’s dreams of success evaporated, followed by years of underperformance and paltry profits. The acquired assets have now been written down to just €45m, indicating the extent of the value destruction.
To deflect from the challenges in North America, C&C management set out the audacious attempt to acquire the Spirit Pub group in the UK during 2014. The bid failed and while management indicated they would have proceeded had the news of the deal not been leaked, several shareholders indicated that they were not in favour of the deal.
Had C&C acquired Spirit Pub, they would have significantly increased exposure to the UK, which is currently experiencing significant pressure, both due to Brexit concerns, a weakening consumer environment and increased labour costs. In short, C&C had a lucky escape and it could well have been a second value-destructive transaction, had it closed.
Acquisition activity has been more muted since 2015. Clearly burnt by previous transactions, management has instead focused efforts on using the company’s increasing debt level to buy back stock, inflating the earnings per share of the company while overall profitability has dropped.
Stock buyback programmes have become normal practice for many Irish companies in recent years. However, they are typically not used in isolation or as an outright alternative to acquisitions. Instead, they are normally part of the overall capital allocation strategy and are complimentary to acquisitions.
It makes little sense to react to a dearth of potential acquisitions by leveraging up an ex-growth company to buy back stock that is continually declining in value because the market is not willing to pay for limited organic growth prospects. But that is what C&C is doing.
Should an attractive deal come along, the company may find itself less able to take part due to a balance sheet more laden with debt, due to the funding the buyback programme.
The net result is that C&C management is running around in ever-decreasing circles and despite the significant capital spent on purchasing the company’s own shares, the share price is currently trading at the lowest level since 2014.
There has been an increasing trend of consolidation in the alcoholic beverage market in recent years.
Rather than trying desperately to find a growth platform, despite holding a tarnished acquisitions record, management may instead best serve C&C shareholders by adopting a strategy of finding a buyer for the overall group.
David Holohan is chief investment officer at Merrion Capital.
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