Starry ambitions drive speed of Constellation venture
It's mid-way through Vinexpo, the world's most important wine trade fair, and I am sitting opposite Stephen Millar, managing director of possibly the most-talked about company at the show - BRL Hardy.
We are only five minutes into the interview and already Millar has had to get up twice to greet important contacts. A quick shake of the hand and an apology but he'll "talk to them later" he promises. He returns to our table, picking up effortlessly where he left off. He is clearly inundated with people trying to prise some time out of him, this interview needs to be done quickly but Millar is also clearly concerned that it needs to be done right.
It is a quirk of life that even businesses the size of BRL can mirror the personality traits of their management and Hardy's recent move into the US market is a case in point. In little over a month Hardy has gone from favourite to buy Kendall-Jackson, the California producer, to the partner in a joint venture with the US's second largest wine supplier Constellation Brands.
Fast work indeed, but the general consensus among the industry's watchers, from analysts to journalists, is that the deal is the right one for Hardy. Australian financial analysts seem to have given a cautious thumbs up, forecasting profits of between US$m37.1m and US$37.6m.
Robert Nicholson of California-based International Wine Associates, which specialises in M&A activities says: "It gives BRL access to Constellation Brands' very strong US distribution network (that is closely allied with Southern Wine & Spirits in key markets & Southern does not appear to have a 'key' Australian supply relationship). This will result in significant volume increase in BRL Oz brands in next 5 years."
Millar plays down the speed of the deal a little, but his ambitions to drive growth in the US quickly are obvious. "For the last two years we have kept the market informed of our ambitions, and we are very ambitious. We divided the world into three core markets, Australiasia, Europe and the US. The US was less strong in the early 1990s so we took the decision to focus on the UK.
"But now the big opportunity is Australian wine in the US, while US wine in the US is the most profitable market in the world. What we had to do was find an acquisition, joint venture or merger to drive our Australian brands and establish a presence in US wine in the US," he explains.
Millar continues: "We were keen to buy the wine division of Seagram but they weren't able to split it off. At the same time we were looking into the Constellation deal we were looking at Kendall-Jackson, but then this was withdrawn from sale."
Surprisingly Millar is on record as saying that the Constellation deal comes a close second to a more preferable Kendall-Jackson acquisition. Onlookers seem to agree the K-J deal would have been better for shareholders in the short-term but the Constellation deal is lower in risk and over time should offer almost all the positives a K-J buy would have done.
"We were keen to buy the wine division of Seagram but they weren't able to split it off"
Millar says: "If we had been successful in the Kendall-Jackson deal it would have been at a good value but the joint venture has a lower entry cost. The Kendall-Jackson versus joint venture [issue] is very close at the end result. KJ would have been better in one year for shareholder return but they are very close in the long-term."
But if an out and out acquisition was more preferable in K-J's case could BRL not have continued to search for an alternative buy? "We wanted to do something major, to play in the big league. We wanted distribution muscle and a US brand," explains Millar. "Any acquisition had to be substantial. Once K-J had gone we didn't think we could get an opportunity with enough muscle and distribution. We could have looked for a smaller acquisition but it would have had no distribution leverage (which is more important in the US than anywhere else)," he says.
And then the question of speed once more comes up. "So we looked for a joint venture with a large company - we wanted to progress very quickly."
Veramonte, Estancia and Simi wine
Interestingly he is only concerned with nailing one major acquisition in this time scale, the rest of the growth will apparently be organic. The search for a suitable target is not going to be easy. Wine company's with international brands or brands of global potential - "we are looking for brands, we are a marketing company" - are few and expensive.
But, although Millar stresses that Hardy will always seek the best deal it can he also says that the price of the acquisition is of less significance than getting the right bolt-on deal. "A company can cost ten times EBIT and be the worst acquisition or it can be 15 times EBIT and be the best. You just need the multiple you are paying to be earning per share positive in the first year. It will be tough but I think we can find it [the right acquisition]."
Nicholson agrees it will take some work to find the right target. "If the new venture wants to acquire a 'meaningful' US winery to grow total joint venture sales from 1.5m cases to 5m cases it will be necessary to pay between US$100-200m. There are not many targets. It will be necessary to pay a multiple of between 12-14 times EBITDA for the joint venture to acquire a brand that can be expected to achieve the goal. This is not 'overpaying' providing the brand is currently well positioned and has the right criteria to be grown significantly."
Pacific Wine Partners is a similar size to BRL Hardy back in 1992 when the Australian parent company listed for A$67m
Since then, 90% of Hardy's growth has come from organic activities which now sees the company's market capitalisation at A$1.54bn, while its initial share price of A$1 has soared tenfold.
Millar is also quick to comment that of the four wine companies that have delivered consistently in shareholder value - Kendall-Jackson, Beringer, Rosemount and BRL - Hardy is the only one to have done so primarily off the back of its European operations.
This bodes well, he says, for the future of the company and Pacific Wine Partners. "The other three have done it in the US, we are the only ones to have done it in Europe. If we can do it in the tough European market we can do it there [the US]. The others will find it much harder to now return focus to Europe."
The Oz category in US could grow from 6m cases in 2000 to 15-20m cases in next seven to ten years, analysts believe. And current predictions suggest BRL could expect to achieve from 15-18% of this, with a low of 2.25m cases or a high of 3.6m cases of Australian wine through PWP alone.
Nicholson concludes: "If the 'right' US winery acquisition is made with starting volume of around 500,000 cases it could be possible to achieve the 5m total wine volume in 10 years."
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