Broker snap: Canaccord raises concerns with Britvic

22nd May 2013 10:06

Canaccord Genuity has kept its 'hold' rating and 380p target price for soft-drinks group Britvic despite a well-received first-half result, raising concerns ahead of its potential merger with sector peer AG Barr.The tie-up between the two companies was referred by the Office of Fair Trading to the Competition Commission in February. A final decision is not expected until the end of July.Analyst Wayne Brown said that while Britvic's interims are strong at first glance, the true underlying performance shows that revenues were up only marginally while volumes were down in every category. Also, while there was an improvement in margins, this includes a reduction in advertising spend. Brown said that this is "unsustainable and reflects a material shift in spend from H1 to H2 raising the question whether this strong H1 performance is being driven by short-term dynamics ahead of the Competition Commission announcement."Meanwhile, Britvic announced a new strategy on Wednesday, saying that it will reorganise its operational structure, make 10-15% of staff redundant, close two factories and form a combined Great Britain and Ireland unit, much of which is needed, Brown said.However, the analyst questioned the timing of this announcement and "if many of the initiatives announced today are a direct result of the proposed merger with AG Barr and form part of the strategic view of the AG Barr management team".Britvic still appears supportive of the merger however Brown said that a key risk will be an attempt to renegotiate the terms which could "scupper the deal entirely". "With the shares trading on 16 times 2013 earnings [...] versus the long-term average of 11 times earnings [...], we see material downside risk were AG Barr to walk away."The shares were up 9.06% at 515p by 10:18 on Wednesday, having risen nearly 43p on the day.