The last 12 months has seen a massive change in the Australian drinks sector as the major companies have moved into new areas and pursued deals that have set the standard in the global drinks industry. But the second tier of producers, a vast army of small and medium sized wine producers for the most part, have struggled and analysts expect the next year to be one of consolidation. Just-drinks thought it would be a good opportunity to examine the state of the Australian drinks industry.

First up the brewers, then the wine makers and finally the candidates for consolidation.

Fosters

As the major drinks business in Australia all eyes have been on Fosters following the impressive acquisition of California-based Beringer Wines. The deal has been a significant change in direction for Fosters, realigning the company towards future growth in wine sales and away from its traditional but mature brewing business. Investors have on the whole been happy to see the shift although concerns have been raised over the company's 100% debt gearing - even after a lightning capital raising exercise last month that generated A$350m overnight.

But Fosters shows no sign of sitting back having made the Beringer deal and has followed up with minor acquisitions including A$35m for US wine merchandise group International Wines Accessories, A$33m for Italian wine group Castello di Gabbiano and A$9.3m for 51% of new Zealand's Matua Valley. While none of these deals comes close to Beringer analysts seem happy to see the Melbourne-based company consolidating its position in the wine industry.

The share price has also performed reasonably rising from A$4.66 last August to around A$5.35, although it has dropped as low as A$4 and been as high as $5.77. Fosters faced the same problems as any brewer in an established market; flat sales in a mature market. It embarked on its wine strategy with the over-the-top purchase of Mildara and then Cellarmaster and for the last couple of years these acquisitions provided the type of earnings growth Foster's shareholders were looking for. Looking for even better earnings growth Fosters pursued Beringer and that deal has provided plenty of growth over the past year and is likely, analysts believe, to look attractive through 2002 as well.


"Beringer is a growth business and as an acquisition has got them [Fosters] pretty solid growth for next year"

But there is a worry about what happens in 2003 when the merger is complete and Fosters is again looking for ways to generate earnings growth. "Beringer is a growth business and as an acquisition has got them [Fosters] pretty solid growth for next year but in 2003 we are likely to get them making another big acquisition in order to grow Beringer's earnings," said one analyst. "They will probably look to use Beringer as a platform in the US."

The other major issue for Fosters in the medium term will be regaining control of its European distribution, particularly if it wants to push Beringer in Europe. Analysts expect Fosters to try to gain control of its European brands and distribution but if that is not possible and if Beringer can find nobody suitable as a partner in the US the group may have to consider a merger with Scottish & Newcastle and/or Miller in the US.

"It's difficult to see how Fosters cannot get involved in Scottish & Newcastle and to a lesser extent Miller if it cannot find the types of deals that will create earnings growth in a couple of years," said an analyst.

In the short term analysts expect Fosters to continue making small bolt-on wine acquisitions and is also likely to re-establish its retail presence in Australia after falling out with Coles Meyer's Liquor Land when the now defunct Wine Planet was launched.

In conclusion, Beringer appears to have bought Fosters at least a couple of years of good growth before shareholders starting getting restless - after that all eyes will be on what Fosters can come up with next.

Lion Nathan

For Lion Nathan the past year has been one long struggle to gain control of New Zealand's Montana Wines, reduce losses in China and continue its attack on Foster's beer stronghold in the state of Victoria. The company, 45% owned by Japan's Kirin, appears to be making progress in Victoria, although at considerable expense, but it has, so far, failed with Montana and in China.

The Chinese operations are still losing money and chief executive Gordon Cairns last week called off negotiations to sell the Chinese assets - an expensive write down appears to be on the cards. Cairns has also failed to follow Fosters into the wine business as Lion's bid for Montana has been dogged with problems.

Lion and Allied Domecq are still tussling for control - who knows how it will end? Analysts have generally been happy to see Lion's share price rise from A$3.80 last year to about A$4.36 now but a number appear to have a very low opinion of Cairns - partly because of his apparent schizophrenic attitude towards the direction of the company.

"Lion Nathan has an embarrassment of riches in Australian and New Zealand brewing with lots of cash flow," said an analyst. "But Lion has burnt a lot of cash in the past and is in danger of doing the same again. Cairns bought a clothing supply company last year and was talking of all sorts of small investments, now he's talking of a wine strategy. Will he make up his mind? Montana was originally a defensive move to stop CUB [Fosters] but now he wants to be in wine. Montana would provide a good initial platform but it's all second rate stuff really when you look at it on a global scale."

Lion has been talking for some time about making wine acquisitions in Australia but is having as little success as in New Zealand. Petaluma and Peter Lehmann Wines are both thought to have told Lion to get lost. Talks with Evans & Tate and Banksia are on going with Banksia possibly the most likely candidate as a distribution agreement already exists between the two companies.

"All this is pretty small stuff and unless Lion can score a big hit this wine strategy will be another half-baked idea," said another analyst. With Fosters stretched after the Beringer deal this was the year that Lion could have made inroads against its bigger rival. But while Lion's beer business remains attractive it has failed to develop Cairn's latest strategy. Fortunately the market is unlikely to run out of patience as the brewing will return enough money to keep the shares strong but if Kirin gets bored waiting for something to happen Lion could become the Australasian satellite of one of the big European brewers.


For more information on the Global Beer Market 2000 click here:
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