In December 2022 AG Barr (LSE: BAG) announced that it had bought sports and energy drink company Boost Drinks. The cost was an initial £20m, on a cash free debt basis. The cost may increase to £32m depending on how the acquired business performs in the two years after the deal is completed.
Yes, this might be old news, but I think this deal makes for an interesting discussion. As a start there are good reasons for AG Barr to get in the sports and energy drinks market, aside from diversification. So, let’s jump in there.
Energy and sports drinks selling price
The British Soft Drinks Association provides information of the total sales, in pounds, and total volume, in litres, over the years for six categories of soft drinks. Divide one by the other and we can get a price per litre in pounds sterling.
Of the six categories, sports and energy drinks sell for a significantly higher cost per litre than the rest. In 2021 a litre of the stuff sold for 2.74p. The next highest price was for fruit juices at 1.90p per litre. Consumers paid 1.51p for a litre of carbonated drink in 2021 which is almost 45% less than foe the same volume of a sports and energy drink.
Now, I would assume that the cost to make a litre of an energy drink is not much different from the cost to make a litre of a fizzy drink, like AG Barr’s Irn-Bru, if we just consider the cost of inputs. The main ingredient for both is of course water. Sweeteners and natural and/or artificial flavourings are common to both, and the same is usually true for carbon dioxide. Energy drinks differ in that they have caffeine, or some other ‘performance boosting’ compounds added.
Similar arguments can be made for the relative cost of a sports drink. They don’t tend to be carbonated, and might contain only natural sweeteners, but do contain electrolytes, perhaps better known as salts. Again, though, the main ingredient is water, with only trace amounts of anything else. All drinks get packaged in either aluminium or PET or the like. A litre of mostly water weighs the same whether it’s being billed as a sports drink or not.
Paying for performance
If I am right about the costs, then no wonder AG Barr wanted to jump into the sports and energy drink market. Instead of starting its own brand it has acquired one by buying Boost Drinks. For the £20m paid so far AG Barr has got the Boost name and recipes, customer relationships, and management expertise as they are staying on. The company outsourced manufacturing, so there is little in the way of fixed assets. But there is also a distribution contract for a UK soft drink brand called Rio.
What AG Barr bought was a head start in building a brand. A brand that pulled in £42m in sales in 2021 (this does include revenues from distributing Rio). The margins Boost was making are, however, a little weak, at least compared to AG Barr’s.
| 2017 | 2018 | 2019 | 2020 | 2021 | |
| Boost gross margin | 23.6% | 21.6% | 22.7% | 26.5% | 21.4% |
| Boost operating margin | 8.1% | 5.9% | 5.8% | 9.1% | 4.4% |
| AG Barr gross margin | 46.9% | 47.1% | 43.9% | 41.1% | 41.2% |
| AG Barr operating margin | 17.0% | 16.5% | 16.2% | 14.9% | 11.8% |
But as we have said, Boost outsources manufacturing. It also focuses on supplying smaller, independent retailers. AG Barr most likely imagines that it in bringing the brand under its umbrella, with its manufacturing, distributing and marketing scale, it can plump those margins up. If it can get the costs per litre for energy and sports drinks down towards its average, then it has more than an extra pound per litre in sales revenue to enjoy.
That should be positive, across the board for margins. Fatter margins mean bigger profits. Bigger per share profits should justify an increase in the AG Barr share price. That’s good news for investors, if it proves to be true. But, it can’t be so easy can it? Consumers are willing to pay more for sports and energy drinks than an equivalent volume of fruit juice, pop, squash, or sparking water. But there must be a reason why they are happy to do this.
Perhaps, the marketing costs a little more. Perhaps gathering evidence that suggests a sports drink does something extra compared to other flavoured waters. There is likely to be additional requirements to be met if you are adding caffeine and other stimulants to drinks, and you are also going to have to study the drinks effects to make the claim that it increases alertness and decreases the sensation of fatigue.
Boost to the AG Barr share price
Perhaps, I am not quite on the money when I say the costs per litre are the same for all soft drinks. Even so, I am confident that AG Barr believes it can fatten the margins it makes on sales of Boost, and its contribution to the bottom line will be positive. In fact it has said that it will be ‘accretive’ to earnings-per-share from year one.
All in all, this does look like a good deal for AG Barr. Its a UK focused bolt on beverage acquisition, that fits very well with the parent company’s stated criteria for acquisitions. I could ask if it could it have built a brand with £42m in sales itself for £20m, or perhaps even the full £32m. Possibly. But it would have taken time and would that have been worth it when a brand was available for what would be an enterprise value to sales ratio of less than one? Probably not.
Actually, the deal could be said to have cost less than £20m or £32m. And this is not actually the first time AG Barr has entered the energy drinks market. It did have a deal to distribute Rockstar Energy drinks in the UK, Ireland and some European countries. But, PepsiCo—what had distribution rights in North America—bought Rockstar, and terminated AG Barr’s contract. The company received £7.6m in compensation. You could knock that amount off the price of the Boost deal. And perhaps more importantly, its reassuring that AG Barr has not only just figured out that sports and energy drinks were worth getting into: it had been there a while, and has just got back in.
DISCLAIMER: James J. McCombie does not own any of the shares mentioned. The Storied Investor has no beneficial ownership position in any of the stocks or securities mentioned. No comment in this article should be construed as a recommendation of, or opinion regarding the future performance of, any stock or security or collection of them mentioned herein. Opinions expressed are the author’s and do not represent the views of The Storied Investor.
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