The latest stage in the increasingly fast-paced evolution of the Australian wine industry unfolded late last month, when the two mid-sized wine companies, Evans & Tate and Cranswick Premium Wines, announced that they were to merge to form Australia's eighth largest wine producer.

The move is both the result of the pressures facing the mid-tier winemakers, who are living beneath the shadow of Australia's big three (BRL Hardy, Southcorp and Foster's) and, no doubt, only the beginning of further industry consolidation.

However, the lukewarm response to the deal by the market demonstrates once and for all that in these difficult times, even in a deal of this scale, in an industry that has experienced nothing but success for 10 years, nothing is now being taken for granted.

Under the proposed merger, Cranswick shareholders will receive four ordinary Evans & Tate shares for every seven shares they hold, plus a cash payment of A$2.60 to be funded from bank debt. The deal values Cranswick at A$57m.

Evans & Tate, as the combined company will be known, will be the country's eighth largest wine company, with a market capitalisation of approximately A$90m. It will control an annual crush of some 51,000 tonnes and 2,000 acres of owned or managed vineyards. Meanwhile, some 200 staff will deal with annual sales of 2.4m cases.

But despite the scale of the deal the reception on the market was decidedly cautious. The day it was announced shares in Evans & Tate Ltd fell by more than 8%. And the general feeling was that Cranswick shareholders were to benefit from the tie-up far better than their new counterparts.

"It's a get-out-of-jail-for-free card for Cranswick," said Stuart Smythe of investment bank Maquarie. "


"Really, you have to question if Cranswick has performed as badly as it has for the last two years…whether [Evans & Tate] can turn it around"
Really, you have to question if it [Cranswick] has performed as badly as it has for the last two years…whether [Evans & Tate chairman] Franklin Tate can turn it around."

And certainly these sentiments were given a timely backup when Cranswick announced within a day of the news of the deal that it expected a loss of A$12m to A$15m in 2001/2002, related to excess inventory and provision for doubtful debts.

Cranswick's problems were compounded when its Australian distributor, Hill International, was put into administration in February this year. And its performance has been on the slide for the last couple of years. In 2001, the company posted a A$3.02m profit on revenues of A$56.06m. The same profit was achieved in 1998 on revenues of A$22.33m.

Evans & Tate shareholders, who have been trading on a healthy premium, will therefore be worried and fears have already been raised that the acquisition may dilute the premium Evans & Tate shares currently enjoy.

For Cranswick certainly this deal offers, if not a life line, then certainly a valuable health boost. Cranswick chief executive Graham Cranswick-Smith said: "As this industry matures, as we become more successful in exports we have to become as efficient as we possibly can.

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"There is a real danger of a company like Cranswick being left in the middle ground, not being big enough to compete and not being small enough to have that cosy boutique feel about it"
There is a real danger of a company like Cranswick being left in the middle ground, not being big enough to compete and not being small enough to have that cosy boutique feel about it. The middle ground is always a very dangerous place to be so we see more consolidation coming in the industry in the years to come."

But the deal is also more than a marriage of necessity for both groups. "We believe a merger with Evans & Tate has the potential to deliver significant benefits to both groups of shareholders," said Cranswick-Smith.

"The fit between these two businesses - unique in their sector - is excellent. The merger will create a significant and fully integrated group, with an enhanced ability to compete strongly on a worldwide basis. Importantly, the merger will also allow us to build on our established presence in key international markets like the UK, Europe and particularly North America."

Tate too argued that the merger was about more than survival. "This is a clear recognition of the complementary strengths of both companies," he said. "Evans & Tate has an excellent penetration of the domestic wine market (the domestic market makes up 85% of its sales), while Cranswick Premium Wines is one of Australia's truly great export success stories.

"Furthermore, this will open up new market opportunities for Evans & Tate in the sub-A$10 (or equivalent) category in both Australia and overseas given Cranswick's impressive low-cost production capabilities."

But perhaps most important of all is that it gives both players scale, in a market where the retailer is increasingly demanding size of portfolio, in depth and breadth.

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"The globalisation of the wine industry means a supplier now has to be able to offer the full spectrum of wines, from premium restaurant to high volume supermarket brands," said Cranswick-Smith. "This merger will allow us to do just that. It will give us the size and critical mass to make a difference and to take advantage of the major growth opportunities for Australian wine companies."

And if investors are still unhappy, then Tate has already hinted that this is unlikely to be the final shape of the company with the new entity a possible acquirer or takeover target itself.

"If other opportunities are about we will consider them…and if there is merit we will give it a shot," said Tate. And he went on to hint that the merged company would welcome takeover approaches as well, although he would not comment on whether he has had discussions with any larger groups thus far.

The merger will take some 18 months to bed down, but already the two companies face interesting questions about how best to move the business forward. And in the very least the merger is a sign that the secondary wine companies face a decision, to compete on the world scene by acquiring or being acquired, or scale their operations down and content themselves with operating in the small boutique market.