Allied's poker face may cost it dear
The battle for Peter Lehmann Wines promises to be one of the most intriguing takeovers in recent drinks industry history. Coloured with a spiraling price tag and bruising rhetoric, the end to this story is almost impossible to predict. Chris Brook-Carter wonders how far Allied Domecq's nerve will hold.
With the story developing on a daily basis it's been a struggle to find enough breathing space to review the battle for Peter Lehmann Wines. However, the announcement on Friday that the board of PLW will not be making any announcement on the most recent bid from Allied Domecq until Wednesday has given at least a few days to take stock of an extraordinary game of financial brinkmanship.
On pure financial terms, the UK giant Allied Domecq sits in the driving seat after a week of bids and counter bids. Hess's initial offer of A$3.50 a share was topped early last week by Allied and its CEO Philip Bowman, who offered A$3.85 conditional on it getting 51% of the stock and A$4 if it got 90%. Hess, with the vocal support of founder and 10.5% shareholder Peter Lehmann, hit back with a A$3.85 a share unconditional bid, only to see it trumped the next day by Allied who raised the stakes to A$4.00 as long as it gains 51%.
Of course Allied's pole position may fall again to Hess anytime this week. But in the long run there is no doubt Allied has the pockets to outbid its rival, however the big question is how far into those pockets is Bowman willing to dig?
Certainly, Allied's portfolio of wines, which has become an integral part of the company's strategy, lacks an Australian name and Peter Lehmann Wines is one of the best still available to acquire.
But the Allied bid, at A$4.00 a share, is already an extraordinary multiple of 20 times historical earnings before tax, expensive even by recent wine acquisitions. Deutsche Bank analysts on Friday said the fundamental value was A$2.35 a share. "There does not appear to be sufficient synergy benefits or growth to justify the high price," Deutsche's analyst Ray Gin said.
And of course this is just the initial cost. Whether Hess is willing or able to match Allied dollar for dollar, Allied's bid looks as if it will always be, at least in part, hostile. Though not a member of the board anymore, founder Peter Lehmann is vehemently against the Allied bid and his influence on the company is still considerable.
Until Hess matched Allied's first bid, the PLW board was split on who to back, with chairman Richard English backing Allied and managing director Doug Lehmann siding with Hess. And a similar scenario may present itself on Wednesday when the board reports back on its recommendations on the increased Allied offer. The initial split provoked an extraordinary outburst from Peter Lehmann, who called into question the future at PLW of English and his two boardroom supporters.
If Allied is successful in gaining control of Peter Lehmann Wines it may then have to gain control of an antagonised Lehmann family - with the prospect of a large financial payout to keep both Peter and Doug quiet a distinct possibility. It is also unclear whether this payout would need to include stipulations that neither Doug nor Peter turn round and launch their own Lehmann Wines company the day after a completed Allied acquisition.
On top of this there are distribution contracts to buy out, in Australia with Yalumba and in the US with Hess itself.
Of course this all assumes Allied wins this battle and gains the 51% it needs. But the fact remains that even with a premium on the final Hess bid, that outcome is far from assured. Though greed usually dictates the final result of any bidding battle, the case of Peter Lehmann Wines is far from usual.
"Given that they are paying a premium to the Hess Group and the distribution they have, it is hard to contend the [Allied] deal strategically and financially. Hess is a small player and does not have the distribution clout Allied has. It is hard to justify resisting it," one analyst told just-drinks last week after the first round of bidding was done.
But although the sentiments at present still run true, the opposition of Peter Lehmann has become more apparent. And Lehmann's influence on the Barossa growers, who hold a considerable chunk of the stock, cannot be ignored. Lehmann has stood by his growers in some very tough times and is now calling on them to do the same for him.
Allied has attempted to persuade the Barossa community of its good intentions, with Bowman saying on Thursday: "We remain committed to maintaining the principles of quality and local autonomy and identity, which have built the PeterLehmann Wines brands into the successes that they are today.
"Our new offer gives all PLW shareholders the opportunity to realise full value for all their shares. We are convinced that it is far more desirable for PLW shareholders to achieve an attractive price for all of their shares - a price that recognises and values the successes of the company - than to accept partially the Hess offer and be locked in as minority holders in a company controlled by a privately-owned group."
But Lehmann has been pulling no punches in his rhetoric. The 73-year-old founder of the company said last week that Allied would put the futures of the growers in jeopardy. "[Allied] have no concept of the importance of the grower relationship, lack the human touch for the staff working for the winery. Above all these people are transients in their big company," he argued.
Could Allied have handled this better, saving itself money and heartache? It took its first stake in PLW in February 2002, but according to both Doug and Peter Lehmann, they heard nothing from Bowman until the bid from Hess forced Allied's hand, some 18 months later.
"If it (Allied's present stake) was a pure financial interest, that (Allied's silence) would be unsurprising. But given they had been talking for sometime about extracting some distribution synergies that is strange," said the analyst.
Unless Allied's desire to now acquire PLW outright is solely a knee jerk reaction to Hess's bid, it is even stranger that Bowman made no contact. "Allied should have been courting Peter Lehmann Wines," said one industry insider.
Though it is doubtful Peter Lehmann's opposition springs purely on a bruised ego, Bowman's failure to give any indication of his intentions has certainly made things worse. And Lehmann recently laid some of the blame for the company's financial downturn on the presence of Allied as a shareholder. "It has been unsettling to our overseas distributors," Lehmann said. And Lehmann's views were echoed by Robert Hill-Smith, managing director of Samuel Smith & Son, PLW's fifth largest shareholder. "I think it's actually had a debilitating effect on brand performance," Hill-Smith said.
"Clumsy" was how one of Australia's leading players described Allied's takeover attempt to just-drinks. "Allied may feel nothing can beat their buck, but it's all going to start getting expensive."
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