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Cott Investor Says LBO is Best Way to Pop Share Value

Tickers in this article: COT DPS KO PEP WMT

NEW YORK ( The Deal ) -- One Cott  shareholder believes the parent company of several soda and non-carbonated drinks brands could fetch nearly $1.8 billion if it can find a buyer, even as waning demand for soda and stiff competition from players including PepsiCo  and Coca-Cola  continue to weigh on the private-label beverage maker.

"Private label is challenged. Carbonated soft drinks are challenged. [Cott's] customers are challenged," said Jack Murphy, a portfolio manager of Levin Capital Strategies , in a phone interview. "Taking out the public equity is one option. Cash flow is so significant, there has to be people looking at that option."

Levin, a New York-based hedge fund, owns about 5.4% of Cott's outstanding shares.

In response to market speculation that it was undergoing a strategic review, Cott confirmed in a Feb. 5 statement that it had retained Credit Suisse Group to help evaluate alternatives.

Though specific options weren't identified, Murphy thinks that if a leveraged buyout transaction were to take place, its equity would be worth significantly more than the $8 or so that Cott's shares are currently trading for on the New York Stock Exchange .

More specifically, the investor believes Cott could demand about $14 a share, which would represent a 75% premium over its current stock price. Given its approximately 94.23 million shares outstanding, that would value a deal at about $1.78 billion.

Murphy based the significant premium on Cott's capability to cut costs and take advantage of the extra capacity to boost cash flow, but didn't say if he based it on a multiple of Ebitda or other financial metric.

Cott most recently generated $77.2 million in free cash flow for the third quarter ended Sept. 28, representing cash flow per share of approximately $0.82.

Murphy believes cash flow per share can exceed $1 a share through cost cutting and other measures.

As of Sept. 28, Cott's cash balance was $125.8 million and debt totaled $608.1 million.

Cott, with headquarters in Toronto, makes and distributes a wide array of carbonated beverages including soft drinks, juices, flavored waters, energy drinks and ready-to-drink teas. Cott is best known for its Royal Crown Cola International, or RC Cola, brand, which it owns everywhere outside North America. ( Dr Pepper Snapple Group Inc.   owns the North American rights). But Cott also owns other private-label brands, including Vess soda products, Vintage seltzer water and mixers, Red Rain energy drinks, Clear Choice sparkling water, Golden Crown juice and Chadwick Bay tea.

Though Wal-Mart Stores   continues to serve as its primary customer, Cott's exclusive supply agreement for carbonated soft drinks was terminated by the retailer in January 2009.

The company has since faced additional headwinds as demand for soda has declined and larger players such as Pepsi and Coke continue to dominate the market.