Following the news last week that Fuller’s is to sell the entirety of its beer business to Asahi in a £250m deal, analysts at Berenberg have compiled their thoughts on the ‘surprise’ announcement, and suggest the sale will give them significant firepower for acquisitions.
In the note, Berenberg said Fuller’s had “surprised the market” by announcing it had agreed to sell its brewing business to Asahi for GBP250m (24x EBITDA).
“While the sale has already been taken well, with shares up c18% since, we think it is just the beginning given Fuller’s is now in a position to deploy north of GBP150m on acquiring premium pubs in affluent locations over the coming years.
“As we await clarity on completion timing we leave our estimates unchanged for now, but show full pro-forma estimates within this note,” it said.
Explaining the disposal: “Beer has become an increasingly tough category in recent years, with an explosion in competition from new craft breweries and Fuller’s traditional category, cask ale, seemingly in terminal decline. Management has done an exceptional job over a number of years to offset those headwinds, including launching its own craft lager brand, Frontier, in 2013.
“However, the company was running increasingly hard to stand still. Brewing sales last year were c70% higher than a decade ago, but EBITDA was roughly the same. Against that backdrop, selling the brewing business for 23.6x EBITDA is a pragmatic step, in our view, and positions Fuller’s well for its next stage of growth.”
Shareholder returns: “The brewing disposal is expected to complete between April and June 2019, with net proceeds of GBP205m – once adjustments and reorganisation costs are factored in. Management has guided to a return of GBP55m-69m through a special dividend to shareholders of 100p to 125p per share. That represents a c9-12% return based on the current share price, which we would expect to be distributed during FY 2020.”
The future of Fuller’s: “Following the disposal, if we assume GBP62m is returned to shareholders (the mid-point of management guidance), Fuller’s will de-lever from 3.0x net debt/EBITDA in April 2019 to 1.1x by April 2020. In our view, a leverage ratio closer to 3.0x would be more optimal, given the company owns the freehold for the majority of its sites. It would also keep Fuller’s as one of the least leveraged of the listed pub players.
“With that in mind, we believe the company now has at least GBP150m of firepower, which it could deploy on acquisitions for its core managed pub and hotel business.”