Lion back in the hunt
By David Robertson | 8 August 2005
After some less than successful diversification in recent years, Lion Nathan is focusing its attentions back on beer and winning the approval of analysts in the process. The company looks set to gain ground in the growing premium beer sector but is also thought to be considering further diversification into ready-to-drink spirits. David Robertson examines Lion's recent activities and plans for the future.
Over the last few years Lion Nathan, the Australasian brewer, seemed to be turning itself into a "mini-me" clone of its great rival, Foster's. Lion spent A$400m on wine brands like Petaluma and Banksia, made expensive moves into China and bought a chain of pubs in order to expand distribution into Foster's backyard state of Victoria.
Meanwhile, Foster's was doing very similar things, except on a bigger scale. But the strategies of these two companies have now diverged as Foster's moves even further into wine with its acquisition of Southcorp and Lion Nathan returns to its core beer business.
Lion owns brands like Tooheys New and Castlemaine XXXX in Australia and Lion Red and Steinlager in New Zealand. Like much of the rest of the world, the beer business in Australasia is a mature market that makes huge amounts of cash but doesn't create much share-price growth.
During the stock boom of the late-1990s companies like Lion Nathan were deeply unattractive given the roaring success of shares in other sectors, notably technology. With flat beer sales in most established markets, brewers have been forced to consolidate in order to boost their share prices but in Australasia this wasn't possible as there are only two significant players: Lion and Fosters, which between them control 96% of the Australian market. Both companies were forced to look at other strategies to provide share-price growth.
Unfortunately, Lion Nathan's moves into wine, China and pubs haven't really worked out. Both the China business and the pubs have already been dumped and wine contributes 10% of turnover, 11% of assets but just 3% of group profits. The wine division needs to double its profits before it starts making Lion money.
So Lion has returned to what it does best - beer. And now that the stockmarket bubble has burst, investors are again looking for cash-rich businesses that will yield big dividends and Lion has come in from the cold.
A senior source at Lion Nathan admits: "A lot of the growth options we pursued in recent years ended up costing us money. Wine is marginal and isn't adding much, we sold China and the pubs. Now we're going back to concentrating on beer - to concentrating on making money."
But to do so, Lion is having to address some problems in its beer business. It is starting with a A$100m investment to improve infrastructure. With money being spent on other projects in recent years a number of facilities have fallen behind optimal performance and Lion is now addressing this under-investment.
Another area of concern is the New Zealand market, where earnings fell by 8.8% in the first half of 2005. Most analysts seem to believe that this is a short-term problem and seem happy to accept that the company has already taken action to remedy this.
Lion is also working hard to build its premium lager portfolio as this is a rapidly growing part of the Australian market. The company controls only 21% of the premium market at a time when this sector is growing at about 10% to 15% a year.
A recent tie-up with Heineken should help Lion make progress within the premium beers category. Sales of Becks, one of the brands covered by this deal, rose by 49% in the first half of 2005. James Squire, another premium Lion brand, rose by 17% but, rather worryingly, sales of the much promoted Hahn brand fell by 12% as the company focused on Becks and Heineken. JP Morgan expects the premium sector to be "an ongoing of both revenue and margin expansion" for Lion. "We think the reason to own Lion Nathan is its strong free cash flow and very defensive characteristics," said Morgan Stanley in a note. "It is one of the few Australian companies that you could say with reasonable confidence, will be here in 50 to 100 years time."
Or could you? Lion is 46% own by Japan's second-largest brewer, Kirin, and rumours continue to circulate as to what might happen to that holding.
Lion Nathan contributes 21% of Kirin's operating profit and, when the Australian company has its house in order, provides much of Kirin's profit growth. It is therefore a very useful asset.
However, Kirin also holds about 21% of the Philippine company, San Miguel, which owns James Boag, a Tasmanian brewer that Lion Nathan would love to own, and has just bought Australian dairy group, National Foods, for A$1.9bn.
There was a rumour last December that San Miguel had offered Kirin A$11 a share for Lion Nathan, whose current share price is A$7.34 - but that was before the National Foods deal. It is more likely that Kirin would swap its 46% in Lion Nathan for a larger stake in San Miguel.
Sources at Lion Nathan argue that the synergies between itself and San Mig's new Australian business, National Foods, don't exist and therefore closer ties make no sense at this time.
However, these three businesses do look to be moving towards the creation of the first pan-Asian brewing company. How the ownership structure works out, and when it happens, will likely depend on Kirin's ambitions.
In the meantime, Lion Nathan's new chief executive Rob Murray, will focus on getting the Australian company's lucrative beer business back on track.
Murray also seems interested in adding distributor Tucker Seabrook to his wine portfolio and expanding Lion's presence in the spirits/ready-to-drink sector.
Lion currently has a small joint venture with Bacardi-Martini but wants to use its marketing and distribution muscle to move in on territory that has so far been dominated by companies like Diageo. Lion Nathan has yet to decide whether it will build its own brand from scratch or seek further joint ventures. Whichever option it chooses, Lion's shareholders will have to hope that lessons are learnt from previous shopping sprees and the move into spirits isn't achieved at the expense of an already much-neglected beer business.
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