Cott Corporation acquires coffee roaster S&D Coffee for $355m

Cott Corporation has entered into a definitive stock purchase agreement to acquire S&D Coffee, a premium coffee roaster and provider of customised coffee, tea and extract solutions to the US foodservice, convenience and hospitality segments.

The purchase price is approximately $355 million and represents six times the value of post-synergy, adjusted pre-tax earnings, Cott Corporation said. Ron Hinson, S&D’s chief executive officer, and S&D’s leadership team have agreed to join Cott and continue to lead the S&D business.

With the addition of Eden Springs announced in June, and following the S&D transaction, Cott’s operating cash flow is projected to rise to between $395 million and $435 million by 2019, the company said. Its gross profit for the last year increased to $253 million.

Jerry Fowden, Cott’s chief executive officer, said: “The S&D acquisition is another great step in our stated strategy to enhance our existing home and office water delivery, coffee, tea and filtration businesses where we believe our platform, operating strength and synergies can be leveraged. The addition of S&D brings our Better for You beverage platform to over 65% of our adjusted EBITDA on a pro-forma basis with carbonated soft drinks representing just 12% of adjusted EBITDA. After closing the S&D acquisition, we will have a leading position in the coffee and tea foodservice industry in North America, which is an excellent complement to our leading HOD water, office coffee and filtration business.”

S&D chief executive officer Ron Hinson said: “S&D was started in 1927 with a vision to produce quality coffee for the local area and has grown over the last 89 years to become a leading premier, national provider of quality coffee, tea and extracts for multiple channels. In order to take the next step in our journey we wanted to find the right partner to support our future growth. In sharing our values and desire to further expand our category leadership in coffee, tea and liquid extracts, we found Cott to be the ideal partner for our business.”

S&D’s growth is underlined by $550 million’s worth of estimated revenues for 2016. The acquisition will broaden the distribution platform of Cott’s existing DS Services coffee business in the US by adding a leading scale platform with in-house roasting, grinding and blending capabilities alongside a national distribution system. Consistent with Cott’s strategy, the acquisition is expected to be accretive to cash flow from operations and adjusted free cash flow, excluding acquisition, integration and transaction costs, in its first full year and provide a cash-on-cash IRR above its cost of equity.

The deal is expected to provide Cott with a leading position in coffee, tea and liquid extracts in the US and continue its shift to higher-growth categories; provide approximately $12 million of run-rate procurement cost, distribution and other synergies achieved over a four-year period; serve as a platform for smaller accretive acquisitions; improve Cott’s channel mix outside of large-format retail and supermarket stores; offer cross-selling and vertical integration opportunities to leverage DS Services’ and Cott’s products; and reduce customer concentration.

Tom Harrington, Chief Executive Officer of DS Services, commented: “We are very excited about expanding our coffee and tea platform in the United States with the addition of a growing, leading coffee and tea business with its own custom roasting capabilities. We believe the acquisition of S&D will provide meaningful benefits from our combined procurement efficiencies, vertical integration and distribution networks, as well as increased management expertise to create a stronger, cash generating, growth-oriented service platform throughout North America.”

The acquisition is expected to close in August 2016.