Investors and research analysts offered timid praise for Cott Corp. a day after the Mississauga-based soft-drink maker announced it snapped up privately owned juice maker Cliffstar Corp. in a $500-million bid for diversification.
Cott's stock price closed up 3 per cent, as research analysts saw potential in the deal, provided that Cott can manage the up to $375-million in unsecured debt it will take on to finance the cash buyout.
This acquisition "diversifies Cott's cash flows into a more stable category than carbonated soft drinks while also providing today's Cott and today's Cliffstar with the opportunity for meaningful cost synergies and revenue synergies," Mark Swartzberg, a research analyst at New York's Stifel Financial Corp., wrote in a research note Thursday.
By acquiring Dunkirk, N.Y.-based Cliffstar for about 70 per cent of its own total value, Cott is showing that it wants to both branch out of the consumer soft-drink market and break away from Coca-Cola and Pepsi. The beverage behemoths were described by Cott's chief executive officer Jerry Fowden as "some of the world's most powerful marketing organizations" in a conference call Thursday morning.
Long term, the deal diversifies Cott's business away from cutthroat [consumer soft drinks]and an inordinate reliance on Walmart. CIBC World Markets analyst Perry Caicco
The deal also signalled that Cott's management team knew a shake-up was needed to restore the company's share price, which has fallen about 40 per cent since last fall in part because the saturated soft-drink market offers little room to grow.
Sixty-one per cent of Cott's sales come from carbonated soft drinks. After adding Cliffstar into the mix, soft drinks will comprise 43 per cent of sales and 36 per cent will come from juices. Meanwhile, expenses are estimated to fall by about $20-million a year.
Debt, however, could be a problem for the merged company. Cott's $500-million cash buyout, plus potential deferred payments of up to $65-million, will be paid for with up to $375-million in new unsecured debt, some new equity, and an asset-backed credit line.
Our first priority for the uses of cash over the next 12 to 24 months ... will be to pay down debt. Cott CEO Jerry Fowden
The leverage is worrisome because too much debt caused Cott's stock price to hover around a buck as recently as early 2009.
Mr. Fowden wants investors to know his management team understands just how burdensome this new liability is. "Our first priority for the uses of cash over the next 12 to 24 months ... will be to pay down debt," he said.
Like Mr. Swartzberg, CIBC World Markets analyst Perry Caicco sees potential in the transaction. "Long term, the deal diversifies Cott's business away from cutthroat [consumer soft drinks]and an inordinate reliance on Walmart," he wrote in a research note just after the transaction was announced Wednesday after the market close.
This dependence on Wal-Mart has been problematic ever since the retail giant announced last year that it would wind down Cott's exclusive deal over a period of 36 months. Under that deal, Cott was the only company allowed to make Wal-Mart's store-brand pop.
Mr. Fowden said the Cliffstar acquisition lessens this dependence. Currently, Cott's Wal-Mart sales make up about 40 per cent its revenue, whereas about a third of Cliffstar's comes from the same retailer. When the two are averaged in the merged company, the aggregate figure will be lower than Cott's current Wal-Mart sales.
But Mr. Caicco also worries about the merged company's growth potential. "What Cott has purchased is a slightly related business without much recent growth, in a category in modest decline," he wrote. But, he added that "Cliffstar's position in that category is strong and its competitors are fragmented."