AUSTRALIA: Constellation firm favourite but BRL field open to rivals
Constellation Brands' move for BRL Hardy has re-ignited international investor interest in the Australian wine sector. While Constellation is still favourite to secure BRL Hardy, other bidders could emerge and the deal looks like it could be a catalyst for further takeover activity. Chris Brook-Carter reports.
Constellation Brands’ projected takeover of BRL Hardy has, almost overnight, revitalised the Australian wine industry. Dogged by fears of oversupply, squeezed hard by domestic retailers in a flat market; and facing criticism for slow return on investment, the international investment community had all but turned its back on the likes of Southcorp and BRL Hardy.
Despite a vigorous round of acquisitions at the beginning of 2002, listed wineries fell out of favour with investors. And yet, a chain of events has been put in place, within two weeks of the New Year, to persuade one Sydney-based analyst to proclaim that the sector was “about to go” in a hive of takeover activity.
It began with the announcement by Lion Nathan that Allied Domecq had agreed to sell its 15% share in the Australian winemaker Banksia, for A$1.27 a share to the New Zealand-based brewer. But the pace really picked up with news that US drinks company, Constellation Brands, and BRL Hardy were at an advanced stage in talks about a merger or takeover.
In fact, the tone of the statements by the companies, which include notice of “no-solicitation” and “break-free” agreements, has led commentators to suggest that a deal could be settled within a week. If this is the case then BRL must be happy it has a good proposal to take to its shareholders. And given the general negative feeling towards the sector only weeks ago, this deal could easily be viewed as an isolated incident.
However, since the news, BRL Hardy’s share price has continued to climb, jumping 17% on Tuesday and a further 1.6% or 14 cents to A$9.09 by Wednesday. Furthermore, the rest of the sector has responded with gains for Southcorp, Foster’s, Peter Lehmann Wines and the other publicly-listed groups. The share activity has been prompted by the dual belief that Constellation’s bid to secure BRL Hardy is by no means a done deal and, if it does go through, would prompt a round of similar deals, as international groups desperately try to gain a piece of the action.
On Wednesday, brokers and analysts said the Australian major, Foster’s Group, and the French-owned Pernod Ricard - which owns Orlando Wyndham in Australia - could tender bids for BRL Hardy, as could UK drinks giants Diageo and Allied Domecq.
Thanks to the “no-solicitation” and “break-free” agreements, Constellation and BRL Hardy have formally agreed not to seek other bidders and pay a premium if they break off negotiations, which are due to be resumed in BRL Hardy’s Adelaide headquarters this week.
But broker JP Morgan said rival bidders would not be put off by this. “There is a realistic chance of a second bidder emerging,” it said.
Analysts believe that Constellation will have to pay between A$9 and A$10 a share, ultimately making the bid in excess of US$1 billion. A number of sources have expressed disbelief that Constellation can afford this sort of cash offer. Meanwhile any share issue will be complicated by the fact that the Sands family holds 50% of the company’s voting rights, and Australian shareholders may be reluctant to hold shares in a company that has never paid a dividend. Rival bidders may be encouraged by this.
Furthermore, for the likes of Allied Domecq and Diageo, wine companies in Australia are beginning to look affordable once again. Combined with the fall in share value in this sector in recent months, a rising Australian dollar is creating a window of opportunity for international investment.
As Salomon Smith Barney client advisor David Robinson was quoted as saying this week: “All these companies are starting to look cheap but, with the Australian dollar looking like it's going to rise, it's probably the last time they’ll be so cheap.”
The price would certainly not be a problem for Diageo, particularly after the recent disposal of its Burger King business, and Allied’s sale of its stake in Banksia may mean it is on the lookout for a replacement wine asset. However, Constellation really remains the favourite.
Allied for one, is on record as saying that Australia’s wine companies are currently over-valued. And, while it is on the hunt for further bolt-on acquisitions for its wine business, these are more likely to be in the region of US$300m-$500m rather than US$1 billion.
Diageo, according to ABN Amro figures, has US$26 billion of debt capacity. With pockets like that the group could easily outbid any of its rivals. But Diageo too has fairly strict goals on its return on investments, and may still view BRL as overpriced. This is not to say it will not be tempted by an Australian wine buy and in truth it could wait quietly in the wings until Constellation had completed the deal and then snap up the combined entity. However, overall, Southcorp may make a better fit for the world’s number one wine and spirit producer.
This perhaps leaves Foster’s as a rival bidder. The company is understood to have close to A$2 billion in funding facilities and analysts believe it needs to make another wine acquisition.
"In our view, the strategic rationale for Foster's to acquire is fairly compelling. We assess Foster's Australian wine operations as sub-optimum scale. Acquiring BRL would give it the necessary size and brand cache missing from its portfolio," said one analyst today.
However in Constellation’s favour, it seems unlikely that anyone will successfully attempt to break the relationship between BRL Hardy and Constellation, which has developed into a strong bond thanks to the success of their joint venture in the US, Pacific Wine Partners. As Merrill Lynch consumer analyst, David Errington, said earlier this week: “The majority of value in a wine company is not necessarily in its operating assets - it is in the relationships the company has with customers, distributors, suppliers.”
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