Intangible Assets and their impact on valuations Part 4
Innocent drinks the British fruit drink and "smoothie" maker renowned for its ethical ethos was founded in 1998 in the UK by three friends who spent £500 on fruit, turned it into smoothies (Innocent smoothies) and sold them at a small London music festival.
In 2007 Innocent began supplying to McDonalds under a five-year trial of using Innocent smoothies as part of their Happy Meals. Innocent recorded a pre-tax profit of £12m (although 10% of all profits were donated to Charity) in 2007.
When the GFC hit in 2008 bringing banks and businesses around the world to their knees, the availability of discressionary spending dried up and consumers moved away from premium products to more affordable alternatives, amoung them Innocent’s pure fruit smoothies. In 2008, Innocent made a £11m loss wiping out any profit the company had previously gained (and performance continued to decline in 2009).
Facing an uncertain future, Innocent required someone to make a significant investment in it.
In 2009, Innocent announced on its website an agreement to sell 10% to 20% of its shares to the Coca-Cola Company who later purchased an 18% stake in Innocent for £30m.
This valued the Company at circa £167m which represented a multiple of around 15 times its pre GFC (2007) earnings (once charitable donations were accounted for).
On the face of it, this appeared to be a large and potentially risky investment for Coca-Cola in a loss-making Company that only had sales of less than £100m in 2008.
In 2010, Coca Cola took a further 40 per cent stake in Innocent.
So why was Coca-Cola willing to pay so much for innocent, what upside did it provide for Coca-Cola and Innocent:
- Innocent had a reputation as an ethical brand that was well trusted, Coca-Cola did not have the same ethical reputation, so it could not create its own similar brand in house.
- The Innocent brand gave Coca-Cola access to the premium drink market.
- Using its size and international leverage Coca-Cola could not only significantly expand Innocent’s sales but it could also provide valuable production and distribution efficiencies to Innocent.
In 2013, Coca-Cola completed its takeover of Innocent, by which time Innocent had increased its sales to over £250m and Innocent was valued at £320m.
A significant part of the growth of Innocent’s sales in this period came from a new product line, fresh orange juice.
Coca-Cola was able to leverage off the strong brand of Innocent to introduce a new product. Innocent’s fresh orange juice sales grew substantially at the expense of the market leader, Tropicana, which was owned by big rival Pepsico.
The two businesses offered each other many synerganistic advantages that would otherwise not be available.
It’s not uncommon for business owners to believe that their brand would be successful if they could secure investment, however such occurrences are relatively rare.
It is also debatable whether the price paid by Coca-Cola for Innocent represents the market value of the Innocent brand or the Special Value of the brand to Coca-Cola (and vice-versa).
Generally when valuing a brand it's best to ignore special value, unless there is real evidence that outside investment would unlock the special value.
References and Acknowledgements
Since joining Rodgers Reidy in 2010, Mark has worked on various insolvency and forensic files. As manager of the forensic accounting team, Mark has the charge of producing expert reports in relation to business valuations and loss & damage claims, as well as preparing solvency reports for other practitioners and reviewing solvency related and voidable transaction claims.