Analysts nervous but Lion keeps hunting
The terrorist attacks in the US have sent global economies into a downward spiral but as David Robertson reports it has provided an opportunity for Australian brewer Lion Nathan to finally launch its wine strategy.
Uncertainty regarding US markets, reflected in a 20% profit downgrade by Robert Mondavi, has hit the share price of wine assets. But more importantly has worried the smaller players into seeking more financially secure partners.
Lion chief executive:
Within a week Lion Nathan had snatched Banksia Wines for A$68m (US$33.8m) and Petaluma for A$261m in a raid that sent jitters through the local stock market and left analysts accusing Lion of going on a mad spending spree, paying way over the odds for the two companies.
Lion has spent many months talking to wine companies about acquisitions and joint ventures, particularly after the aborted bid for New Zealand's Montana Wines. Lion chief executive Gordon Cairns worrying for some time that the price of these wine companies have been way too high eventually bit the bullet and opened his wallet, never a nice thing for a Scotsman to have to do.
The companies he bought are high quality and well respected, they turn over a profit and together make Lion a producer of more than half a million cases of wine a year. Not bad for a week's work.
"We think there is quite a bit of unrecognised valuation in these companies and we are quite happy with our valuation"
But JP Morgan says the Petaluma deal is not value-accretive, meaning not a good deal. At $7 a share, which is the Lion offer, the purchase will deliver a return on investment of just 3.8% compared with Lion's average of 7.8%. Merrill Lynch also expressed concerns about the price, as there were no synergies to pay back the high valuation.
The Petaluma deal is also expensive given that it is valued at 15.2 times earnings before interest, tax depreciation and amortisation compared with 13 times for the Foster's acquisition of Beringer and 13 times for Southcorp's Rosemount deal. Both these were considered full prices so it's not surprising that analysts have got jumpy.
The wobbles in the US market have not helped and many analysts are questioning the wisdom of the deal.
Add to the mix the looming presence of Allied Domecq and things could once again get interesting Down Under. Allied beat Lion to buy Montana after a bad-tempered four month battle and Allied's advisors Goldman Sachs have busily been buying shares in both Banksia and Petaluma following the Lion announcements. This may just be Goldman looking to profit on behalf of its client, Allied may just be trying to give Cairns nightmares or it may seriously be looking to spoil the party.
But Lion remains bullish about its purchases. "We think there is quite a bit of unrecognised valuation in these companies and we are quite happy with our valuation," investor relation's director Warwick Bryan told just-drinks.
"If you look at the valuations done by the analysts most don't follow Petaluma and don't recognise all the value. We identified these two and from our perspective they are wine companies with a most favourable future."
Bryan believes that the uncertainty in the US helped convince the two companies to accept Lions offer - both of which have been recommended by not formally accepted.
While the price being paid by Lion is high it is by no means exceptional. Companies in other sectors regularly pay well over 15 times EBITDA and only four years ago Simeon Wines bought Australian Premium Wines for 20.1 times EBITDA. The year before Southcorp paid 19.4 times for Coldstream.
The timing may not be perfect but the financing does not seem outrageous (a bid for BRL Hardy would have to be well in excess of 15 times EBITDA at the moment). But what Cairns really has to justify is whether this is a move he needs to make at all.
Lion has a bad reputation for throwing money away - all brewers do, it is one of the problems of being a cash rich business; there are so many temptations to spend it. Lion now has two very separate companies with a host of high quality but relatively small volume brands. It has appointed the former head of Chandon Estates US operations, Dominic Bach, to oversee its wine division but with a combined profit of just A$9m this is still only a very small distraction from the beer business.
There is no doubt that wine is trendy and Lion's desperate attempts to get into the business may have more to do with keeping up with Fosters and getting a toehold in a growing market than serious value creation.
"The big question hanging over Australia's lemming infested $2bn wine industry is whether we are witnessing a grand exercise in the greater-fool theory, or in fact whether everyone can win by paying even more to copy the incumbents," stated the Australian Financial Review.
Lion is late to the party, it is paying a lot of money for a small operation and doing so at a time when confidence is plummeting - no wonder there are doubts. But even if Lion is doing a lemming impression the fortunate thing about brewers is that they have deep pockets so the company should survive long enough to embark on the next trendy idea.
Wines & Spirits in Australia 2001
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