JP Morgan analysts have given their views on the learnings from Fuller’s sale of its beer company to Asahi, including a read-across from the Fuller’s deal to a scenario where Marston’s or Greene King might consider selling their brewing assets.
The note says: “Following the recent acquisition of Fuller’s beer company by Asahi, we conduct an analysis to explore the potential value of the brewing business of two companies within our universe with broadly similar brewing operations to Fuller – Greene King and Marston’s. We reiterate our Overweight (OW) on Marston’s and Underweight (UW )rating on Greene King, and make no changes to estimates or price targets in this note.
• The Fuller’s beer company is being acquired for 23.6x LFY (last financial year) EV/EBITDA by Asahi Group Holdings (covered by JPM analyst Ritsuko Tsunoda). However, we subtract an estimate of the value of Fuller’s Griffin brewery, reducing the multiple to ~16.2x (pre-synergies), to obtain what we believe is a better indicator of a possible value for Marston’s or Greene King’s brewing divisions. We calculate that the implicit valuation of Fuller’s beer company prior to the acquisition announcement was 10.7x LFY EBITDA and that the average EV/EBITDA multiple for precedent beer company transactions of sub $1.5bn was ~11.8x over the past 18 years.
• What are the brewing divisions of Marston’s and Greene King’s potentially worth? We see broad similarity between Marston’s and Greene King’s brewing divisions and that of Fuller’s (including ale and UK focus, export opportunity); thus, we see a read-across from the Fuller’s sale to a scenario where Marston’s or Green King might consider the sale of their brewing assets.
• How much value could be unlocked? Assuming a comparable ~16.2x LFY EV/EBITDA, our scenario analysis finds that a sale of the brewing divisions would imply 21%/5% equity upside potential for Marston’s/Greene King from current levels, assuming the current market valuation is 10.7x EV/EBITDA (in line with the implicit valuation of Fuller’s beer company prior to the acquisition announcement). In this note we present scenarios for hypothetical sales at various multiples. Neither Marston’s nor Greene King has indicated an interest in divesting their brewing assets, and we undertake this analysis simply to illustrate the potential optionality.
• Marston’s and Greene King are highly leveraged, which has concerned investors. Marston’s recently announced a credible plan (note here) to address this, but a sale of the brewing division would represent an accelerated resolution. Under our scenario of a 16.2x EV/EBITDA brewing division sale, our calculations show reductions in Marston’s/Greene King’s forecast headline FY20E ND/EBITDA from 5.6x/3.9x to 3.7x/3.2x.
• Recommendations; we are OW Marston’s as we expect its valuation gap to peers to narrow as its pricing discipline supports margins and LFL profit growth. We are UW Greene King, believing that its poorer quality PubCo estate and weaker market position make current LFL revenue trends unsustainable and margins vulnerable.