In an extreme example of a January purge, beverage maker Cott Corp. announced plans on Wednesday to permanently give up coffee and tea, and become a pure-play provider of bottled water.
Cott is looking for a buyer for its S&D Coffee and Tea division, which roasts the equivalent of 56 million cups of coffee each day for customers such as convenience stores and fast-food outlets. Cott acquired the North Carolina-based business from its founding family in 2016 for US$355-million, and analysts expect it could now fetch up to US$430-million.
In a news release, the Toronto-based company said it hired an investment bank to advise on a potential sale, as part of a strategic review that will “transition Cott into a pure-play water solutions provider.”
The decision to put the coffee business up for sale comes a year after Cott named Tom Harrington as its chief executive. Mr. Harrington started his career at Coca-Cola Co., then joined Cott in 2014. Since taking the top job last January, Mr. Harrington has acquired three water-related businesses, including European bottlers and filtration companies.
Cott was founded in 1920s and traces its roots to making no-name soft drinks. The company sold its pop business to Dutch beverage firm Refresco for a total of US$1.3-billion in two transactions over the past two years.
In a research report published before Cott’s announcement on the sale of its coffee business, RBC Capital Markets analyst Nik Modi said Cott is expected to continue expanding by snapping up water businesses, and highlighted the U.S. bottled-water division of Switzerland’s Nestlé SA as a possible target.
The North American coffee industry is relatively fragmented, and includes major restaurant suppliers such as Aramark Corp. and publicly traded specialty coffee companies such as Farmer Bros. Co. Analysts said Cott’s coffee and tea business is expected to attract interest from both strategic rivals and private-equity funds.
“We see the potential divestiture as a positive,” said analyst George Doumet at Scotia Capital Inc. In a report, he said: “In the last few quarters, Cott’s coffee and tea business experienced margin pressure and lower-than-expected volumes, resulting from higher competition.”
Last year, coffee and tea accounted for approximately 25 per cent of Cott’s US$2.3-billion in annual sales – the company sells the equivalent of 23 million glasses of iced tea each day. However, Cott earns far larger profits selling water – including the massive bottles that sit atop office water coolers – than it does on coffee or tea. In a recent investor presentation, Cott said its annual earnings before interest, taxes, depreciation and amortization (EBITDA) from coffee were US$39-million, which translated into 7-per-cent EBITDA margin, versus a 17-per-cent EBITDA margin from its water business.
If Cott does sell its coffee and tea division, the company is expected to initially use the money to pay down debt. In the long term, Scotia’s Mr. Doumet said the sale would give the company “ample capacity” to expand in the water filtration area.
Cott’s stock price rose 4 per cent on Wednesday following release of the news, closing at $18.49 on the Toronto Stock Exchange.
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Andrew Willis