The much-anticipated merger between Marston’s and Carlsberg UK had been pushed back, leading to a drop in the shares of Cockermouth’s Jennings Brewery. Currently trading at $40.58 after news of the push-back emerged, this creates an opportune moment for investors who want to capitalize on the upcoming £780 million deal.
How will the Merger Drive the Value of Marston’s Shares?
Under the terms of the agreement, Marston’s will receive a 40% stake in Carlsberg Marston’s Brewing Company, and a cash equalisation payment of up to £273m. Marston’s said it will focus on its pub and accommodation business while retaining its stake in “a larger, more attractive brewing business”.
The London-listed company said that for “procedural reasons”, the UK’s Competition and Markets Authority will now be the relevant competition authority rather than the European Commission.
“As a result, completion is now anticipated to take place slightly later than expected as the CMA completes its review,” it said, adding that it is expected to take place in the fourth quarter rather than the third.
“As stated previously, we do not expect that the transaction raises any competition concerns and are satisfied that the group has sufficient liquidity in place to meet its requirements ahead of completion.”
The consensus among analysts monitoring the deal is that the formation of Carlsberg Marston’s Beer Co (CMBC) will be a masterstroke by management. It will provide both a significant initial cash injection (of up to £273m), an annual ongoing cash contribution (circa £20m consistent with that as a standalone entity) and upside from potential future cost and revenue synergies through its retained 40% stake, according to Shore Capital analyst Greg Johnson.
The £780 million deal will bring Marston’s Pedigree and Hobgoblin beers under the same roof as Carsberg and Holsten Pils. Announced in May, it is expected to be finalized in the fourth quarter of 2020, subject to shareholder approval and competition clearance.
The Combined Strength of Heritage and Revenue
Marston’s is known for its heritage, extensive distribution platform and established reputation for brewing and logistics excellence while the Jennings brand is 192 years old.
The creation of a joint venture with the new name CMBC will see Marston’s own 40 per cent and Carlsberg 60 per cent.
Ralph Findlay, chief executive of Marston’s, said: “I am delighted to announce the joint venture with Carlsberg UK.
“This new partnership acknowledges Marston’s strategy, position and consistent outperformance against the UK beer market, realising value for shareholders today, whilst retaining an interest in the future upside of the combined entity.
In November, the Midlands-based Marston’s reported a £3 million drop in profits despite a rise in revenues.
The company, which also has 26 pubs across Cumbria, reported an underlying pre-tax profit of £101 million for the year ending September 28 – down on the £104m reported for the same period in 2018.
Revenue, however, rose to £1.17 billion for the same period – up from £1.14bn in the previous year.
As the hospitality sector continues to feel the effects of the lockdown, Marston’s moved away from plans to build pubs, revealing it had reduced its capital expenditure by £40m in the last year.
The announced merger is a strategic move that will see the company strengthen its position on the UK market and tap into Carlsberg’s flourishing business in China, which rebounded strongly during the first and second quarters. The Danish multinational brewer saw an improved demand towards the end of the second quarter in the western European region as well.
Carlsberg shares gained over 40% since March’s trough and were trading 5.37% higher at the time of writing. The full interim financial statement for H1 2020 will be published on August 13, 2020. It remains a top pick for many analysts who view the company’s geographic mix – its lack of exposure to Americas/Africa and presence in China as a way to speed up top-line recovery.