Corby Spirit and Wine (CSW.CA) is a Canadian manufacturer, marketer, and importer of spirits and wines. In June 2023, the conservative management there did something uncharacteristic by acquiring a 90% stake in privately held Ace Beverage Group for $148.5 million. The odds are decent that shareholders will ultimately be rewarded, writes Benj Gallander, president of Contra the Heard.

The remaining 10 per cent will be held by Ace’s founders. The deal was funded from cash on hand plus $120 million from Corby’s parent, Pernod Ricard.

Ace Beverage, launched in 2013, is in the “ready-to-drink” segment of the alcohol industry. Its brands include Ace Hill, Cabana Coast, Cottage Springs, Good Vines, and Liberty Village. Ace has achieved a sales CAGR of 37% from 2020 to 2022, currently holds an 11.8% share of the RTD market in Ontario, Canada, but does not have much presence outside that province.

From Corby’s perspective, this deal will diversify and boost revenues. The spirits subsegment has grown at roughly 2% annually over the past five years, while RTD has surged by 20%. The name of the game is to capitalize on this RTD trend, increase Ace’s presence in Ontario, and expand in the rest of Canada.

Corby also argued that Ace is asset-light, has low capex, and produces high returns on equity. CSW expects the takeover to goose its revenue by 35% and be highly accretive to EPS a year out. That bodes well for continued dividend payouts, which yielded 6% at the end of the second quarter.

So, those are the goals, the schemes, and the dreams, but as with many mergers, investors should ask, “How much does it cost?” The purchase price of $148.5 million is 2.7 times Ace’s annual sales of $56 million; Corby recently traded at about 2.5 times. Ace’s enterprise value, at 2.9 times sales, is also higher than Corby’s 2.2.

Moreover, the debt load will jump from basically nothing to 1.8 times net debt to adjusted EBITDA. This debt load is not crazy, and Corby is supported by Pernod Ricard, but it is something to watch. My take is that Corby is paying for growth through this transformative acquisition and is taking on debt (and risk) to do so.

Corby’s latest quarter was eventful. Revenue grew by 43% and adjusted earnings from operations 36%. Odds are that people will continue to drink to celebrate and drown sorrows. That bodes well for this enterprise.

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