Campari toasts to successful LdM sale

Gruppo Campari cherry picks “The Pearl of the Caribbean” to help rescue CL Financial and engineers the break-up of Lascelles de Mercado In 2007/08, CL Financial and its subsidiaries bought more than 81.4 per cent stake in Jamaica’s Lascelles de Mercado (LdM) for US$676 million. At the close of business on August 31, 2012, Lascelles de Mercado’s shares closed on the Jamaican Stock Exchange at US$3.13. On the morning of September 3, 2012, investors were greeted with the (welcome) news that Gruppo Campari of Italy (the parent company, Davide Campari-Milano SpA, had sales for 2011 of 1,274.2 million euro had negotiated the purchase of selected assets of LdM at a price of US$4.32 per share (approximately J$380.00) and US$0.57 (J$50.0) for the preference shares. The purchase price represents more than a 38 per cent premium on the closing price as at the end of August 2012. The total consideration is expected to yield US$414.7 million to LdM shareholders, which also include Clico and Angostura. On the first day of trading on the Jamaican exchange after the takeover announcement, Lascelles’ shares closed at J$323.55 (US$3.68) with only 7,700 shares traded. By week’s end, the price of Lascelles shares had risen to J$374.34.

The specific assets that are being sold comprise primarily the spirits business, including well-known brands, such as Appleton Rum, Appleton Special/White, Wray & Nephew and Coruba. Also included is a prominent consumer products distribution company. Let us refer to the segment assets of these two groups and see what they represent. As at June 2012, the distilled spirits and sugar group had assets of J$17.355 billion while the general merchandise group held J$3.13 billion in assets. Essentially, the total assets of J$20.48 billion or about US$232.8 million are being sold for US$414.7; this represents a premium of 78 per cent. The understanding/agreement between Gruppo Campari and CL Financial concerning the remaining assets, which are estimated to be worth at least J$16.64 billion (US$189 million), is that they are to be sold and the proceeds distributed to existing LdM shareholders in the form of a special dividend(s). The sale of the company is expected to be completed before the end of December 2012; the divestment of the remaining assets might be completed around the same time, but could overflow into 2013. From the perspective of CL Financial, a huge challenge would be its ability to realise sufficient profit from the sale of the remaining assets to recoup or, perhaps, exceed its original total cost of US$676 million. More precisely, can it sell approximately US$189 million in remaining assets to realise a profit of better than US$338 million (US$676-US$338)? [Note: the US$338 million represents 81.4 per cent of US$414.7 million]

As we have already seen, LdM has sold its shares in Carreras Ltd. Its other investments must now be sold in an orderly manner to realise the best prices for its shareholders. The sale of its insurance operations, which include Globe Insurance and Twickenham Insurance, could represent a huge opportunity for regional insurers to expand their market share. It is interesting to note that since the release of their half-year reports to June 2012, the share prices of both Guardian Holdings Ltd and Sagicor Financial Corporation have strengthened on the local stock exchange. In the case of the former, its price moved up strongly from $16 in early July 2012 to almost $20 recently. In Sagicor’s case, the price appreciation has been less dramatic, moving from $7.25 in early August to $8.02 recently, with some shares being offered at $8.85. It is not unreasonable to assume that either of these two companies could be the preferred buyer for LdM’s insurance businesses. With J$6.4 billion (US$73 million) in identifiable assets, it should be possible to sell these companies for a reasonable premium, perhaps garnering as much as US$100 million. A release from Guardian Holdings Ltd posted on the Jamaican Stock Exchange late on July 7, 2012 confirmed that GHL had signed a share purchase agreement with Lascelles de Mercado to acquire Global Insurance Company of Jamaica Ltd. Further details of this transaction will follow. The transportation services division has assets of J$1.15 billion (US$13.1 million) and represents a hodgepodge of many small enterprises. These include AJAS Ltd, Sterling Motors Ltd, John Crook Ltd, Transportation Agencies Ltd, Cars and Commercials Ltd and Kingston Garages Ltd. It may be very difficult to sell all these diverse companies en bloc.

What might be possible is to sell some of the companies to the current managers and employees. This process could be very timeconsuming. Because of the relatively small sizes and variable profitability of the companies grouped in this segment, it is difficult to hazard a proper guess as to the final sale prices that might be realised. Pessimistically, one may be able to achieve US$10 million; at the other extreme, it might be possible to get maybe US$17 million. Hopefully, the higher figure prevails. Lascelles’ investment assets are shown as having an asset value of J$8.526 billion or almost US$97 million. This is the remaining value after the successful sale of its shares in Carreras Ltd in the April to June 2012 quarter. Unfortunately, the company’s annual report does not detail the extent of these investment holdings. However, it is reasonable to assume that most of these holdings were acquired at relatively low prices over a very long period of time. Perhaps, it is these holdings that are the key to LdM generating huge returns and, in the process, returning (possibly) enormous special dividends to its shareholders. We might hazard a guess that these investments could realise as much as US$200 million; if so, a realised profit of US$103 million (US$200-US$97) could be paid out to shareholders. Based on the above comments, the following table shows a summary of the projected profit that might be realised on the remaining assets. Using my rough calculations, it seems possible that CL Financial could recoup almost US$447.5 million from its outlay of US$676 million for the purchase of 81.4 per cent of Lascelles de Mercado. This is computed by adding CL Financial’s portion (81.4 per cent) of the combined value of both Campari’s offer price and the profit shown above. [81.4 per cent x (414.7 + 135)] Dividends paid in 2011 totalled J$42.20 and so far in 2012 dividends of J$40.25 have been disbursed.

Collectively, CALLA Lilly and CL Spirits own 78,136,170 shares in Lascelles. Dividends on these shares for both 2011 and 2012 total J$6.44 billion, which is equivalent to US$73.2 million. When these figures are included, the possible loss is somewhat mitigated. While many observers may have had their eyes focussed on heavyweight companies like Diageo, Pernod Ricard or Bacardi to be among the favourites to make this kind of offer, it was the smaller Italian distiller, Gruppo Campari, which won out in the end. The benefits to Campari would be many as detailed in its press release from Milan. A few of these include acquiring a leading position in the lucrative rum market in the touristoriented Jamaican economy; provide a foundation for future international growth; extend the reach of the Gruppo Campari portfolio. Campari will also acquire a stake in the lucrative premium and prestige rums segment, represented by the Appleton family of 12-, 22- and 30-year old rums. With more than 50 per cent of Campari sales concentrated in Italy and other European countries, this acquisition would help diversify its income stream. Another attraction is the 4.1 per cent growth in the total retail value of rums in Jamaica that was observed over the last five years. Also, Appleton, Wray & Nephew and Coruba rums enjoy a dominant share of the Jamaican market. There is some speculation that Lascelles de Mercado would eventually be renamed Campari Jamaica. [Given the very difficult state of world financial and economic conditions, this deal, as presently structured, would seem to be reasonable.

From the perspective of the Jamaican people, it would mark a sad day to see its treasured local rum company now fall under the control of an Italian entity. One wonders if the Jamaican government or the acquiring company can do anything that would make this fact more palatable to its proud people.] Assuming the deal goes through as planned, then another short-term beneficiary would be Angostura, which owns slightly fewer than three per cent of Lascelles’ shares. After the dust has settled and it completes a period of digestion, it is possible that Gruppo Campari could start to take a closer look at Angostura with an eye to taking up a significant shareholding. With Angostura having both CL Financial and Clico as its major shareholders, this idea is not too farfetched to contemplate. Already, some investors have anticipated this possible development, as Angostura’s shares have once again started to move up in price