M&A activity clouds future of Australian wine giants
The Southcorp-Rosemount deal was the most interesting business move of last year as it merged two wine makers with very different strategies.
"Southcorp is a production driven company and Rosemount a marketing driven company so the combination of the two looks good," said an analyst.
Southcorp now accounts for half of all Australian wine exports to the US and, thanks to brands like Penfolds and Lindemanns, 70% to 80% of value.
"Production has been shifted so Southcorp is now selling more into the US which makes a lot of sense as it creates far more cash than keeping it here," added another analyst.
But the biggest challenge for the merged Southcorp, and potentially the biggest advantage, is whether two very different companies can be compatible. Southcorp is production intensive with a return on invested capital of only 8%. It has A$1.7bn (US$860.7m) in assets and more than 20 brands. Rosemount by comparison has a return on invested capital of 35%, a single brand strategy with grape growing outsourced to other producers.
Southcorp now accounts for half of all Australian wine exports to the US
"Rosemount has been efficient despite being capital constrained," said an analyst. "It has been very judicious at taking advantage of what other people can offer. Southcorp is an extraordinarily asset intensive business and it cannot be run in the same way as Rosemount because it really IS the industry in Australia. But there is a lot of scope to move towards the Rosemount model and make Southcorp a much more efficient and a low-cost producer."
But investors cannot seem to make up their minds about Southcorp despite a rapid rise in share price from A$4.81 last year to over A$7 now. Merrill Lynch has downgraded the company from long-term accumulation to neutral and Morgan Stanley is a seller but JB Were is a buyer. Attitudes towards the company seem to depend on how hard Lambert is selling the merger to institutions with one PR offensive producing a 17c share price gain in one week in June.
According to Macquarie Equities the company will see 1.9% earnings growth in 2002, 8.2% in 2003 and a staggering 17.4% in 2004 - if these figures turn out to be right then the optimists will be laughing all the way to the bank.
For the pessimistic investment houses some of the worry seems to be directed towards the Oatley family who are building their stake in Southcorp-Rosemount to 19.9%. When they stop buying analysts worry the share price could collapse. There is also a general concern over what the Oatley family plan to do in the coming years - hold or sell?
"If they really push the Rosemount model on Southcorp over the next two years they are probably getting ready to sell it. But if they are concentrating on their core and reinvesting heavily in Penfolds etc., they'll probably keep the company," said an analyst.
Diageo and Allied Domecq have already had a sniff around Southcorp, according to one analyst, and there is also a feeling that were it up for sale, Allied would be very keen to buy. But if Southcorp were not sold then a hot possibility in a couple of years would be a US merger - possibly with Mondavi.
"That would be a great deal," said an analyst. Southcorp has already set up a joint venture with Mondavi, which will market its co-produced wines globally. And with this agreement already in place analysts believe that further ties are likely between the two companies.
Southcorp will receive bids for its water heater division on July 27th and is expected to sell at the end of the year, assuming the sale raises the estimated $700m the heaters are worth. By then many of the Rosemount benefits will be flowing through and with a $700m war chest the time would be right for a deal with Mondavi.
BRL is the plucky performer of the Australian wine industry. It lacks the financial clout of its rivals but has still produced fantastic results, including a jump in share price from A$6.86 last August to nearly A$10 now.
When the company, famous for its Nottage Hill and Banrock Station brands, floated in 1992 it was worth a paltry A$67m but is now capitalised at more than A$1.5bn. Impressive by any standards (float share price was just $1).
"BRL has been the underdog but has still done well. They have not had the access to capital that their rivals have had and they are in danger of letting the game change and get away from them. In many ways though they have done far better than either Fosters or Southcorp," an analyst said.
Desperate to keep up with the big boys BRL announced its intention to bid more than A$3bn for the US's Kendall-Jackson, which is now making its own moves into Australia. It took many analysts weeks to stop laughing and it came as little surprise when BRL failed to pull off the deal. Buying Kendall-Jackson would have been a "sensational" deal but analysts just could not see how BRL would raise the cash on terms that would make it acceptable to shareholders.
The US accounts for only 7% of BRL's earnings and the company wants to increase its presence on the other side of the Pacific. Having been slapped down by Kendall-Jackson BRL came back with the most unusual deal of the year - a joint venture with Constellation Brands.
Getting into bed with Constellation on anything like an even footing is a creditable achievement but nobody seems to have much idea what it means.
ABN Amro's David Cooke was "mildly positive" about the venture - hardly the enthusiasm that greeted the Rosemount or Beringer deals. BRL is putting A$80m into Pacific Wine Partners and is also handing over US distribution rights to nearly all its brands. Constellation meanwhile is supplying its Monterey winery, 530 hectares of vineyard and the Farallon brand.
The plan is to create a wine company capable of cracking the market that BRL has mined so well in the UK and Australia - cheap but with quality. BRL already wants to float the new venture but it seems a little early to be predicting great success.
The whole thing could be a disaster and it will be hard to convince shareholders that it is a workable idea until it starts making attractive returns. But BRL has proven it can make the $10 or £5 market work and if it succeeds in the US it could yet join the big boys.
In the meantime BRL will have to keep a close eye on its UK business, which is a major part of its operations. The Asda supermarket has already been flexing its muscles with both BRL and Southcorp threatened with having brands pulled off shelves if prices go up. The supermarket has already dumped Southcorp's Lindemans label. So far the winemakers have held firm but with UK supermarkets such an important market BRL (and Southcorp) could see their bottom line pinched.
Barring an outbreak of hostilities in the UK Merrill Lynch is forecasting A$71m profit this year and ABN forecasts a rise to A$88m next year.
Allied Domecq has already shown it wants to make a move into Australasian wine with its bid for Montana, ruining Lion Nathan's easy run at New Zealand's biggest wine maker. Analysts think Montana would be a great fit for Allied, which could then be tempted by Southcorp. Another possible route for Allied would be a joint venture with one of the smaller wine makers such as McWilliams. Allied would gain wine expertise in Australia and a good selection of wines while McWilliams would overcome the problem of finding distribution as a small player. It sounds so sensible that a number of analysts are convinced it will happen.
Wine industry commentators will have to wait until September to see how the Americans do producing Australian wine
Nobody will look at a bid for Lion Nathan until Kirin sells its stake but rumours have been floated regarding the fate of Fosters. Could it be a target for Heineken? Nothing has emerged so far and Fosters would be staggeringly expensive at the moment - even with the weak Australian dollar.
Kendall Jackson has just announced that it plans a presence in Australia, having been courted by BRL Hardy in a proposed sale earlier this year. But Kendall failed to reach the price that owner Jess Jackson wanted (US$2bn) and the company was not sold. Instead it has revealed plans for an Australian brand called Yangarra Park that will be sold in the US and UK.
Production will be outsourced to local vineyards. While this is a bold move some analysts find it hard to work out what K-J gains, as it will have significant hurdles to overcome, not least of which will be maintaining control and quality from suppliers it knows little about.
Will yet another good Australian wine find room in the UK? Will the new brand cannibalise Kendall's own sales in its domestic market? Wine industry commentators will have to wait until September to see how the Americans do producing Australian wine.
The other major foreign presence in Australia is Pernod Ricard through its ownership of Orlando Wyndham - another company on the fringe of being a major player in the wine market. Since the Pernod deal, Orlando has dropped off the radar in terms of major news announcements and most analysts have not followed the company closely; Orlando seems to be bedding down with its new owner.
Perhaps we will hear more in the coming 12 months although having made its Australia deal it is possible that Pernod will just let Orlando get on with business as usual.
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