The production line at an Absolut vodka plant in Ahus, Sweden, on Oct. 22, 2012. Absolut is one of the brands in Corby Spirit and Wine’s portfolio.Linus Hook/Bloomberg
In June, 2023, Corby Spirit and Wine Ltd. CSW-A-T announced it would acquire Ace Beverage Group in a huge transaction that would fundamentally change the company and alter its trajectory. With one year in the books, it is important to look back at how the deal has gone down so far, and what the future may hold.
For those who are new to the story, Corby historically focused on manufacturing, marketing, and importing spirits and wines. The company’s brands include many popular labels such as Polar Ice Vodka, Lamb’s Rum, J.P. Wiser’s Canadian Whisky, and more. Prior to 2023, the company’s top and bottom lines were flat, the balance sheet was consistently in a net cash position, and the enterprise enjoyed the support of French distillery giant Pernod Ricard, which owns a 51-per-cent stake.
Although this business model was stable and produced good margins in the mid- to high teens, it lacked growth. Management hoped to change that last year with the $148.5-million acquisition of Ace Beverage Group, which had a larger footprint in Western Canada and was focused on the “ready to drink,” or RTD, category. The RTD segment was attractive because it had climbed at a compounded annual growth rate of 20 per cent between 2017 and 2022, and was projected to continue at a 13-per-cent pace through 2027. By contrast, Canada’s spirits market was inching higher at around 2 per cent a year.
To fund this transaction, they did not issue stock, but increased debt significantly. In return for leveraging the balance sheet, Corby’s executive team thought the move would help them expand into Western Canada and gain market share across all its business units, especially in the RTD category. They estimated revenue would climb 35 per cent while significant earnings-per-share accretion would follow within a year after the deal’s close. They also projected net debt to EBITDA of around 1.8 times.
As one could reckon, Corby had to pay up. When the deal was announced, Corby had a price-to-sales ratio of 2.4 and an enterprise value/sales ratio of 2.2. By contrast, Ace was acquired at 2.6 on a price to sales basis and 2.8 on an EV/sales basis. Long story short, Corby was paying for growth, and using debt to fund it.
One year in, and Corby’s class A shares are down roughly 6.3 per cent. While many valuation metrics such as price to sales, price to book, EV/sales, and price-to-cash flow are at decade-lows, the price to earnings is at decade-lows, too (excluding the pandemic sell-off period in early 2020.)
The stock’s performance suggests that there is a lot of investor skepticism out there; this cynicism likely has a lot to do with how the enterprise has performed against their forecasts.
On the one hand, the company is moving into Western Canada, has increased its market share across all its operating segments, and has increased revenues more than the 35 per cent initially envisioned.
On the other hand, EPS is flat with no EPS accretion so far, and margins have fallen. Moreover, in the past two quarters, long-term debt has stood at $120-million, compared with zero prior to the Ace Beverage purchase. Short-term debt is also up, and the debt-to-EBITDA ratio now stands at an uncomfortably high 2.1 times versus expectations of 1.8 times.
To an extent, the lack of EPS accretion and leverage is understandable. Rapid top-line appreciation after the acquisition is the easy part. Even when M&A goes well, integrating operations and driving profitability can take longer than hoped. To send the ticker higher, management needs to drive bottom-line accretion and improve the balance sheet while continuing to boost sales, increase market share, and maintain its dividend.
From our angle, the valuations today appear to be pricing in a bleak future where management is unable to do this. While this outcome is possible and M&A integration is full of cautionary tales, our bet is that the market is too pessimistic. Our guess is that Corby will continue adding to sales and increasing market share, and maintain its dividend, too. We also anticipate EPS accretion to start showing up later this year as integration work continues.
If Corby keeps increasing its top line, it will look somewhat cheap, and if there is an expansion of the bottom line, it will look very cheap. Either scenario should power the stock higher. In the meantime, owners are being paid via dividends to wait, and we have Corby as one of our top income picks for 2024.
Philip MacKellar is a writer for the Contra the Heard Investment Letter.
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