Cott Corporation (NYSE: COT) (TSX: BCB) announced today that it has signed a definitive agreement to acquire privately-held Cliffstar Corporation, the leading private label manufacturer of shelf stable juices, for cash consideration of $500 million, payable at closing, and subject to adjustments for working capital and other items.
In addition to the $500 million due at signing, Cliffstar is entitled to $14 million of deferred consideration, which will be paid over a three-year period. Cliffstar is also entitled to additional contingent earnout consideration of up to a maximum of $55 million, based upon the achievement of certain performance measures during the fiscal year ending January 1, 2011 as well as the successful completion of certain expansion projects in 2010. Cott expects to receive a significant cash tax benefit generated from the deduction of the step-up in tax basis resulting from the acquisition of Cliffstar's assets. The net present value of this cash tax benefit is estimated to be approximately $75 million. The closing of the transaction is subject to receipt of financing and other customary conditions, including receipt of required regulatory approvals.
"As the clear leader in private label shelf-stable juice, Cliffstar is an ideal partner for Cott as we strengthen our position in private label beverages," said Jerry Fowden, Chief Executive Officer of Cott. "A combination with Cliffstar expands Cott's product portfolio and manufacturing capabilities, enhances our customer offering and growth prospects, and improves our strategic platform for the future. Combined with Cliffstar, Cott will be a more diversified company with long-term advantages for our shareowners and retailer partners."
"In Cott, we have found the right long-term strategic partner for Cliffstar," said Stanley Star, Chairman of the Board and co-founder of Cliffstar. "Cott, like Cliffstar, has a long history of private label excellence and quality as well as close partnerships with its customers and suppliers. In addition to a strong position in juice and various new age growth segments, Cliffstar brings expertise in juice ingredients, processing and bottling that are complementary to Cott's strengths in carbonated soft drinks. I believe the combination will be beneficial for Cliffstar's employees, customers and suppliers into the future."
"We expect the combination with Cliffstar to be accretive to our shareholders on a cash basis," added Fowden. "In addition to strategic and operational upsides, the transaction is expected to generate significant tax benefits and synergies. Adjusting for these factors, we believe the purchase price is favorable relative to comparable transactions. This transaction will transform Cott into a multi-category beverage producer which we believe will benefit our customers and create value for our shareholders."
Founded in 1970, Cliffstar, a privately-owned corporation headquartered in Dunkirk, New York, is one of the leading suppliers of private label beverages and the largest private label producer of apple juice, grape juice, cranberry juice and juice-blends in North America. With $654 million trailing 12 month revenue, Cliffstar operates eleven facilities in the United States, including five bottling and distribution operations, three fruit processing facilities, two fruit receiving stations and one storage facility, and has approximately 1,200 employees.
The $500 million payable at closing and $25 million in anticipated transaction costs are expected to be funded by a combination of new debt issuance of up to $375 million, new common equity issuance of up to $95 million, and incremental borrowings under Cott's asset based lending facility of $75 million. The specific amount of new debt and equity will be determined at the time of issuance. Cott expects to amend its asset based lending facility in connection with the transaction to increase the amount of borrowings available under such facility. Both the financing and the acquisition transactions are expected to close in the third quarter of 2010.
Expected Benefits of the Transaction
The combination with Cliffstar is expected to result in:
A larger, more balanced business with a diversified and complementary portfolio across many categories of private label beverages, better positioning Cott for future growth.
A broader portfolio with increased innovation capabilities and high service levels as a combined supplier across multiple beverage categories, including carbonated soft drinks, juices, and waters, as well as new age beverages such as enhanced waters, and natural fruit beverages. The combination provides an attractive single-stop solution to the private label beverage needs of our retailer partners.
Total identified cost synergies of $20 million on an annualized basis($14 million of which are expected to be realized in 2011). The synergies are comprised of realization of economies of scale and theoptimization of administrative and operational groups.
Additional (and incremental to the above synergies) longer-term opportunities for growth within a combined customer base through leveraging of existing customer relationships and sales into new beverage categories.
A significant cash tax benefit generated from the deduction of the step-up in tax basis resulting from the acquisition of Cliffstar's assets.The net present value of this cash tax benefit is estimated to be approximately $75 million.
Pro forma trailing 12 month revenue (ended Q1 2010) on a combined basis in North America of $1.8 billion and pro forma global consolidated trailing 12 month revenue of $2.3 billion and Adjusted EBITDA of $246 million, or $260 million inclusive of 2011 synergies, but before transaction-related costs and after adjusting for certain items (See attached reconciliation of GAAP operating income to non-GAAP Adjusted EBITDA).
Transaction expected to be accretive on a cash basis from year one (cash basis accretion excludes the one-time expenses related to the transaction and the impact of non-cash items such as the amortization of intangibles after the transaction).
Cott Q2 2010 Estimates
Cott provided the following estimates of key financial metrics regarding its estimated consolidated Q2 2010 results on a stand-alone basis:
Filled beverage volume of 207 million cases (8oz equivalents)
Consolidated revenue of $426 million
Operating income of $37 million
Cott clarified that the foregoing Q2 estimates are preliminary and actual results could vary by up to 2-3% in either direction for revenue and volume, and up to $2-3 million in either direction for operating income.
"Overall I am pleased with the preliminary results of our second quarter performance, given the quarter saw a significant increase in much-publicized national brand promotional activity," commented Fowden. "While we would not typically comment in advance of final results, we hope these estimates are helpful in evaluating the business combination with Cliffstar."
Deutsche Bank Securities Inc. acted as financial advisor to Cott on the Cliffstar transaction. Drinker Biddle & Reath LLP acted as legal advisor.
Morgan Stanley acted as financial advisor to Cliffstar on the transaction. Skadden, Arps, Slate, Meagher & Flom LLP and Lippes Mathias Wexler Friedman LLP acted as legal advisors.