Lord Karan Bilimoria: On Cobra Beer’s comeback

Last year, Cobra Beer, one of the UK’s fastest growing beer brands, crashed into administration after failing to secure further capital to fund its aggressive expansion. Founder Lord Karan Bilimoria tells GB how one of the UK’s fastest growing beer brands fell victim to the financial crisis

When Lord Karan Bilimoria appeared on the cover of Growing Business in April 2008, the future of Cobra, the beer brand he started from scratch 19 years earlier, couldn’t have looked brighter.

He is pictured posing alongside Adrian McKeon, the chief executive he had appointed just eight months prior as he stepped back into the role of executive chairman. The pair are all smiles – with good reason. The business had achieved revenues of £55m in the year to May 2007, and McKeon, who came with an impressive CV, told us of his plans to make Cobra a top-10 premium lager brand in the UK.

This involved developing new sales channels – particularly pubs, clubs and hotels – as well as growing the label’s presence on supermarket shelves, all adding to solid sales in the Indian restaurant sector where the brand made its name. The two-year plan would see Cobra making UK revenues of £100m and entering 20,000 new outlets, supported by a £14m TV, radio and press ad campaign.

Just a year on, Bilimoria found himself working on a company voluntary arrangement (CVA) after running into serious financial troubles. When the CVA fell apart the day before it was due to complete, Cobra was “forced” into a controversial pre-pack administration, leaving unsecured creditors £70m out of pocket.

On June 1 2009, Cobra re-emerged, bought out of administration for £14m in a joint venture between Bilimoria and Molson Coors, the $10bn brewing giant that owns best-selling UK beer brand Carling. Eight months on, he is ready to tell the world his side of the story.

Biting back

Before we begin our interview, he wants to set something straight: “What’s upset me a great deal about what we went through last year is the way it’s been reported in the press,” he says. “The true story has never been reflected.” After hearing the hour-long speech that he has just delivered to the members of TiE, the entrepreneurs’ organisation of which he was a founding member, I have already surmised as much.

When introducing his fellow TiE charter member, Nish Kotecha, the organisation’s UK president (whom Bilimoria later tells me was a trusted friend and adviser throughout the ordeal) suggests that it’s about time people understood what really went on.

“There were statements like Cobra Beer never made a profit – of course we made a profit over the years,” continues Bilimoria. “But what we definitely did was sacrifice the bottom line – very deliberately – for top line growth.”

For a start, he wants to make it clear that forgoing the bottom line in return for market share was always the gameplan, and a strategy that was very much deliberate. “You need critical mass with an FMCG (fast-moving consumer goods) product, particularly with beer,” he says.

In this respect, it was extremely successful. Competing against centuries old brands, Cobra became a household name from a standing start in less than 20 years. Brand awareness between 2006 and 2009 “increased significantly”, helped by sponsorship of comedy channel Dave, and even as the company collapsed into administration, as far as most consumers were concerned it was business as usual. “Wall Street didn’t affect Main Street,” he says. “From a consumer’s point of view, Cobra to this day is doing very well.”

Rolling over

So what went wrong? The over-riding factor was the financial crisis, he says. After pursuing an aggressive, debt-funded expansion, Cobra got into serious trouble when it ran out of money and was unable to secure further funding in the midst of the credit crunch.

However, he remains adamant that the furious growth strategy was not reckless. Far from it; not only was it necessary to reach the desired level of brand recognition, but banking on the ability of a company of Cobra’s standing to continue to raise money seemed a safe bet. After all, the brand’s value had already been “proven” in a previous fundraising.

“It wasn’t talk, it wasn’t on paper; we were raising money on that valuation. In the summer of 2006 we raised millions of pounds at £80m equity value. What happened was the world changed, and when the world changed, suddenly financing dried up. Nobel prize winning economists didn’t predict it,” he implores.

The type of finance the business took on in 2006 also played its part, he concedes. At the time, Cobra raised £27.5m, £25m of which came through PIK (payment in kind) notes from hedge fund Och-Ziff Capital, which enabled debts to be rolled over. “Hedge funds were going through their own problems. There’s no doubt that in this situation they wanted to get out,” he says.

That said, he is convinced that had the economic crisis not occurred, growth would have continued uninterrupted. “We would have had access to finance, it would only have been a question of the valuation we raised the money at.”

Against the wall

The Cobra story is also punctuated by some exceptionally bad luck. Following unsuccessful attempts to raise the necessary funds in 2008, Bilimoria was approached by Diageo, one of the largest drinks companies in the world. They had spotted Cobra as a rising star and wanted to arrange a deferred sale, buying 30% (providing the growth capital they urgently needed) and placing a director on the board, but leaving the management team to run it for three to five years, after which they would buy the balance for an amount based on a multiple of sales.

The deal had an equity value of close to £80m, Bilimoria tells me, but it fell through, quite literally, at the last minute. “We had run out of options,” he admits.

On the insistence of their hedge fund backers, Cobra went into a full blown sale process in which they approached “every brewer in the world”. Again, he highlights the value of the brand at the time. “When we went into the sale process in November 2008, even after Lehman’s and the whole collapse, external analysts were setting the enterprise value of the company at £175m to £185m, including the debt,” he says.

With the financial crisis now in full swing and no apparent buyers, Molson Coors suggested a joint venture through a CVA – Bilimoria agreed. “I never wanted to sell,” he says. From March to May 2009, both companies worked with their advisers on the arrangement, securing agreement from 90% of the unsecured creditors, more than the 75% they needed. It collapsed when Wells & Young’s, one of Cobra’s largest suppliers, pulled the plug.

“We were due to hand it into the court on May 22. On May 21, out of the blue, one of our biggest suppliers, who we owed a lot of money to, put in a statutory demand to close down our business at the behest of their credit insurers,” Bilimoria recalls.

“There’s a flaw in the CVA system,” he continues. “Unlike a Chapter 11 (in the US) where you’re given a window after which you’re protected, in a CVA you are exposed all the way up until the last minute. Anyone can pull the rug from under you.”

However, he was reassured by the way Molson Coors handled the news. “They could have taken full advantage of the situation,” he says. Instead they said they would honour the same deal. The company was “forced” into the pre-pack administration as the “least worst scenario”.

While he’s painfully aware of the way these deals are perceived – closed negotiations, often enabling the same owner to carry on a business as if nothing had happened after wiping out creditors and shareholders – he insists that this was not the case at Cobra.

“That is the unfortunate reputation of pre-packs,” he acknowledges. Is this unfair, then? “No, quite frankly, because they’re misused so much by people who will deliberately go into it,” he replies.

“But that’s not that they’re designed for. They were designed for exactly what happened to us, and they benefit a brand and employees in exactly the way that it’s benefitted us – in saving the brand and giving it a better future going forward – albeit in the most horrible circumstances – rather than destroying everything.”

He adds that the outcome was never pre-determined. “We went through a proper process. We went back to every single person who had shown interest in the pre-pack. They could have outbid us. It was in no way a forgone conclusion. We could have lost the business.”

“Adapt or die”

The joint venture is now called the Cobra Beer Partnership and Bilimoria, who owns 49%, is chairman. Molson Coors’ behaviour throughout the restructuring confirmed the companies’ shared cultural values to Bilimoria, who says integrity and trust are extremely important to him.

He too could have taken advantage of the situation, he says. “There were times when I could have wiped out my shareholders, I could have wiped out my creditors. I could have not treated my employees as well as we have. And sadly, in a lot of pre-packs that’s what happens.”

Instead, he chose to take shareholders with him to the new company to share in future profits and ensured all employees were taken care of. Any redundancies were non-statutory (“given the circumstances people were looked after incredibly well”). He sustained huge financial losses himself and has even vowed to pay back the unsecured creditors who lost out.

The ordeal has clearly left its mark. He cuts a more subdued figure than the beaming individual I first met at an event in 2007 and his TiE speech, while exceptionally delivered, carries a stark warning to the entrepreneurs in the audience: “Adapt or die”.

The former Arthur Young (now Ernst & Young) chartered accountant and Cambridge law graduate even remarks several times that he could have easily ended up on the other side of the table when meeting with business advisers over the past year. It’s the career path his father (the former Commander in Chief of the Central Indian Army) wanted him to pursue.

However, while he has clearly agonised over past decisions, his passion for his brand has remained intact and he seems resolute to move forwards rather than dwell on the ‘what ifs’. “Hindsight is 20:20,” he says. “If I could have seen it, then yes, with hindsight I wouldn’t have taken on the hedge fund money in 2006. But on the other hand – it’s not as simple as that.

“Without that finance I wouldn’t have been able to grow in the way that I did and create the brand awareness. Without that scale, who knows if we would have been as attractive to someone like Molson Coors to do the joint venture that we’re in today?”

Similarly, he says the collapse of the deal with Diageo, which he “so desperately wanted to go through”, may well have been a blessing in disguise given the way the financial crisis panned out, although Cobra’s creditors might not agree.

“We as a management team would have been locked in to a formula of exit in three to five years’ time, based on a multiple of sales and contribution, trying to deliver that in the economic environment that we have today. We would have worked and worked and literally in a year and a half’s time might have given the business away to them. We would have been forced to sell, and would have got nothing out of 25 years of hard work. I would have just had to give my brand away.”   Although clearly devastated by the way it happened, he is confident that the new structure puts Cobra in a stronger position. “This 49% that I have in this joint venture, theoretically, for me and my shareholders, could in five or 10 years’ time be worth much more than if we could have continued on our own.”

He also insists that he is operating the business in a completely different way – something else that distinguishes his situation from the stereotypical pre-pack. There’s a new office – the Cobra Beer Partnership is based in Molson Coors’ London base in Covent Garden – and a new board.

Samson Sohail, who along with Bilimoria is largely attributed with Cobra’s success in the Indian restaurant sector, is resuming the role of ethnic restaurant sales director, while Dynshaw Italia will continue as finance director. New additions include Mark Hunter, Molson Coors’ UK chief executive, Adrian Davey, the MD of the JV with 21 years’ experience in the brewing industry, and Kevin Wallace, former head of marketing for Carling. Adrian McKeon left the business just before the pre-pack and is now beers, wines and spirits category director at Asda.

“We’ve got some of my old team combined with a new team in this giant organisation with all the benefits of the synergies, which goes straight to the bottom line: buying power, production, marketing, sales, finance, admin, the works. We’re running the business in a completely different framework.”

Cobra is also going back to its roots in Indian dining. Trevor Beattie (the man behind FCUK) is currently working on an advertising campaign to reinforce the brand’s connection with curry, while Bilimoria believes there is also “enormous potential” for growth in the supermarkets; Cobra is still available in almost all of them. It is also in M&S, which recently began stocking a small selection of branded products for the first time.

In India, where Bilimoria still has full control of the business, he is currently looking for £7.5m to fund expansion in a market that is growing at more than 10% a year.

However, he insists that there is now an absolute focus on the bottom line rather than growth. “There is no plan to do a Green and Black’s and Cadbury’s and treble the sales in three years. If that happens, great, but profitable growth is the key.”


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