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Can Lucas Bols Compete With Diageo?

|Includes: Brown-Forman Corporation (BF.A), BF.B, DEO, LVMHF, PDRDF, REMYF, VOC

Summary

Lucas Bols, An Interesting Spirits House With Valuable Brands.

Diageo, Always Looking For M&A Targets.

Undervaluation Of Lucas Bols Could Drive Company In Arms Of Competitors.

Last Wednesday, February 4, the Amsterdam Stock Exchange IPOd Lucas Bols at €15.75 ($18) per share. Lucas Bols is a Dutch company selling a range of spirits brands with a heritage dating back to 1575.

Lucas Bols is one of the oldest Dutch companies still active and Bols is the oldest distilled spirits brand in the world. It has a portfolio of more than 20 brands across a range of spirits products, including liqueurs, genever, gin and vodka.

The company's products are distributed to and sold globally in more than 110 countries, divided in four geographic markets: Western Europe; Asia-Pacific; North America; and Emerging Markets.

The Group's global premium and superpremium spirits brands, which represented 69.2% of the Group's revenue in FY 2013/14, include Bols Liqueurs, Bols Genever, Damrak Gin, Bols Vodka, Galliano and Vaccari.

Lucas Bols has leading market positions in the Liqueur Ranges category with a number one position in the world outside the US and a number three position in the US, which represents the world's largest liqueurs market. Many of the company's other products have market or category-leading positions in the Group's geographic markets.

The Bols brands also include the House of Bols Cocktail & Genever Experience, and Europe's largest bartending school, the Bols Bartending Academy. The House of Bols Cocktail & Genever Experience offers visitors an experience into the world of cocktails and bartending, as well as a discovery of the traditional Dutch genever.

History

The following table summarises key dates and events in the Group's history.

1575

The Bols family arrived in Amsterdam to open 'het Lootsje' where they would distil liqueurs. The starting point of what would become the world's oldest distilled spirits brand. The Bols distillery grew quickly and the original 'Lootsje', a wooden shed, was replaced by stone buildings. The name 'Lootsje' remained.

1652

In 1652, Lucas Bols was born. He was an influential business man, living in the Golden Age, when Amsterdam was the world's major trading city. Lucas Bols managed to turn Bols into an international brand and greatly expanded the range of liqueurs. The herbs and spices of the Dutch East India Company (NYSE:VOC), which was the first company with publicly traded shares, played an important role in this development and Lucas Bols had, as a major shareholder in the VOC, first choice of the 'new' herbs and spices that seafaring merchants brought into Amsterdam from the West Indies. With his knowledge of distilling, he created 300 different liqueurs, by distilling, macerating and percolating those natural ingredients.

1664

The company started producing the first genever, at that time a very common drink.

1816

After years of prosperity the last male member of the Bols family died in 1816. The company was sold under the proviso that the name Lucas Bols should always be retained. The new owner received approximately 300 original, handwritten Bols recipes as part of the legacy.

1868

The company was sold to the Moltzer family who put a lot of effort into large scale export of Bols products.

1954

The last member of the Moltzer family left the board of directors and Bols Distilleries became a listed company in Amsterdam.

1956

Lucas Bols started its cooperation with Brown-Forman Corporation (BF.A, BF.B) in the United States, currently one of the leading global spirits companies.

1969

Lucas Bols moved to Nieuw Vennep, because further expansion in Amsterdam was impossible.

1997

The merger with Koninklijke Wessanen, which was effected in 1993, was dissolved, whereafter Lucas Bols moved to Zoetermeer. The product range meanwhile 97 included many well-known brands, such as Bols, Bokma, Hartevelt, Coebergh, Pisang Ambon, Gold Strike, Hoppe and Henkes.

2000

Lucas Bols was taken over by Rémy Cointreau (OTCPK:REMYF) and the Avandis production joint venture (the Netherlands) was formed.

2006

Lucas Bols became independent by means of a buy-out by its management and AAC in 2006 and moved its organisation back to Amsterdam.

2007

The company opened the House of Bols Cocktail & Genever Experience, winner of the Dutch Design Award in 2007 and created the Bols Bartending Academy.

2008

The company re-launched Bols Genever from 1820 and was awarded Best Cocktail Initiative 2008 by Drinks International Magazine and Best New Spirit at Tales of the Cocktail 2009 (New Orleans). In addition, the company established the production joint venture Bols Kyndal (India).

2009

The Group renegotiated a major part of its distribution agreements following the dissolution of the distribution network Maxxium World Wide and acquired 50% in the distribution joint venture Maxxium (the Netherlands).

2010

In 2010, the company set up a fully owned subsidiary in the US as distributor for Bols Genever, Damrak Gin and Galliano.

2013

The Group acquired Wynand Fockink, a distillery and its nearby tasting room 'Proeflokaal Wynand Fockink'. Wynand Fockink is an artisanal Amsterdam liqueur and genever brand that dates back to 1679 with a wide range of products. All these products are available in the 'Proeflokaal Wynand Fockink'. The Group also took the distribution of the Bols Liqueurs in the US in its own hands.

2014

The distillery acquired in 2013 was opened in 2014 and all distillery activities have moved to the renewed Lucas Bols Distillery located in the centre of Amsterdam, next to the Dam square and close to the Rozengracht where the Bols-family started its activities in 1575.

Why US investors have to know about this small cap from The Netherlands?

The last weeks institutional investors in Frankfurt, Paris, London, New York and Boston embraced this Dutch company, because of diversification and valuation purposes. There are just not that many international spirit companies.

Strengths

One of the strengths of Lucas Bols is their flexible and asset-light business model allowing management to focus on core activities. A large portion of the production process (blending and bottling) is outsourced to strategic partners. The production joint venture Avandis, in which the company has a 33% participation, undertakes the blending and bottling process for the majority of the countries where the Lucas Bols sells its products.

The Bols Liqueurs for the US market are blended and bottled locally by Brown-Forman Corporation, with whom the company has had a longstanding relationship since 1956, see history.

Lucas Bols relies on its strong and long-standing relationships with its distribution partners in order to ensure the route-tomarket of its products. It operates via a cost efficient and flexible organisational structure. It has no ageing stock on its balance sheet and a history of very limited uncollectable trade receivables.

The Offering

The proceed of the offering will be used to repay debt and will not be used to grow the company's business.

The post IPO free float is 64.9%, assuming no exercise of the over-allotment option. The total number of issued and outstanding ordinary shares of Lucas Bols is 12,480,3291.

One of the big competitors of the company is Diageo (NYSE:DEO).

Diageo

Diageo is the product of a merger between Grand Metropolitan and Guinness in 1997. The company is the world's leading producer of branded premium spirits. It also produces and markets beer and wine. Brands include Johnnie Walker blended scotch, Smirnoff vodka, Crown Royal Canadian whiskey, Captain Morgan rum, Baileys Irish Cream, and Guinness stout. Diageo also owns 34% of premium champagne and cognac maker Moet Hennessy, a subsidiary of French luxury goods maker LVMH Moet Hennessy-Louis Vuitton (OTCPK:LVMHF), and a 55% stake in India's United Spirits.

Diageo's incentives to continue consolidation is to broaden its product portfolio. Volume in the spirits industry is fairly stable, but trends are transient. For example, the current shift away from white spirits (mainly vodka) to brown spirits is a reversal of the trend in the 1990s. The breadth of Diageo's portfolio across categories with both global strategic and local niche brands mitigates some of the risk to volume from such shifting consumer tastes and preferences. Nevertheless, bourbon and Irish whiskey are examples of gaps in Diageo's category footprint.

Premiumization will be a significant long-term tailwind for global distillers. Today in mature markets, spirits are taking share from beer and wine as consumers trade up. In both the U.S. and the U.K., for example, the distilled spirits category has added an average of around 20 basis points of share of throat from other categories every year for the past decade, and a continuation of that trend could support Diageo's volume in developed markets.

Comparison

 

Lucas Bols could be an interesting takeover target in some years, especially if they can grow their business in emerging markets.

Final Note

Lucas Bols works in close collaboration with professional bartenders from all over the world to develop new products, create new flavours and adapt old recipes. The ability to innovate and to build and maintain long-standing relationships with professional bartenders in the geographic markets where the company is active are key factors which could contribute to the success of Lucas Bols.

This approach is totally different than that of major players such as Diageo , Remy Cointreau and Pernod Ricard (OTCPK:PDRDF). These powerhouses are looking more to the acquisition side to achieve growth.

Risks

Spirits companies are subject to heavy regulation and taxation. Governments may enact policies that place restrictions on Lucas Bols or Diageo's business activities or increase liquor taxes, resulting in a demand headwind. Recently, the Chinese government's crackdown on gifts to government officials has led to drastic drops in demand and price in scotch and the ultrapremium baijiu segment.

Distilled spirits is more cyclical than some other consumer staples industries, including brewing, and more closely tied to economic growth.

Diageo's acquisition strategy is inherently risky--the firm could destroy shareholder value if it overpays for acquisitions. Also, most of Diageo's maturing inventory is stored in Scotland. If this maturing inventory suffers a catastrophic loss due to contamination, fire, or other natural disaster, Diageo may not be able to satisfy consumer demand, and insurance may not fully cover the replacement value of the lost inventory.

Sources

- IPO Prospectus

- Morningstar

- Reuters Eikon

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.