How will Coca-Cola Amatil fare should SABMiller snap up Fosters Group?

How will Coca-Cola Amatil fare should SABMiller snap up Foster's Group?

Ray Rowlands of independent research consultancy Drinksinfo Ltd considers the potential outcome for Australia's Coca-Cola Amatil should SABMiller eventually succeed in its bid for the Foster’s Group's beer business.

Earlier this month, the Foster's Group turned down a multi-billion dollar takeover bid from SABMiller, claiming that it significantly undervalues the company. As a global brewer, SABMiller has expanded over the years beyond its South African homeland to become one of the world’s biggest brewing concerns.

It is also a major soft drinks bottler. The company bottles for Coca-Cola in El Salvador, Honduras, South Africa and various other African markets. In Australia, it operates Pacific Beverages, a joint-venture company with Coca-Cola’s local bottler Coca-Cola Amatil (CCA). The announced rejection from Foster’s came shortly after CCA had amended the terms of the joint-venture agreement to enable SABMiller to post its bid.

Foster’s, the troubled Australian brewer, whose CEO, Trevor O’Hoy, resigned in 2008 shortly before the company posted its lowest full-year result on record, has been considered a potential takeover target for some time. In September 2008, Canadian brewer Molson Coors dipped a toe in the water and acquired 5.3% of Fosters shares. This move was closely followed by speculation of a multi-billion dollar merger between Fosters and Coca-Cola Amatil, but this was quashed soon after. The split of Foster’s beer and wine operations in May this year made a takeover scenario all the more likely and SABMiller has not been put off by its recent rejection and appears intent on continuing its pursuit. But, how does this affect CCA? 

CCA is the company responsible for the entire Coca-Cola soft drinks portfolio in Australia. In 2006, it entered into an agreement with SABMiller to distribute the latter’s beers via a 50:50 joint venture, Pacific Beverages. This company became operational in October 2006. It was set up initially to import SABMiller’s international premium beer brands, Peroni Nastro Azzurro, Miller Genuine Draft and Pilsner Urquell. It has subsequently increased these beer offerings and has also gone into spirit distribution, with CCA taking on the sales and marketing of the Maxxium spirit portfolio on behalf of Pacific Beverages. The arrangement with Maxxium was replaced by a partnership with Beam Global Spirits & Wine earlier this year. Also, at the end of 2007, the JV acquired a facility of its own, when it bought the Bluetongue brewery.

In overall volume, SABMiller’s brands have added an estimated 10m litres to CCA’s product assortment. The spirits business is considered to be of a similar volume. Then there's the Bluetongue brewery. Following the construction of an AUD120m (US$128.7m) plant at Warnervale on the NSW central coast in 2010, its production capacity has been extended to 50m litres. In comparison, CCA is responsible for an extensive soft drinks portfolio well in excess of 1bn litres, around 75% of which belongs directly to Coca-Cola. That’s just in Australia: CCA actually has operations in five countries – Australia, New Zealand, Fiji, Indonesia and Papua New Guinea. 

So, in volume terms Pacific Beverages has not brought a lot to the table. However it is very much in line with CCA’s all beverage approach, which has included the purchase of the Grinder’s Coffee Group in August 2005 and the introduction of flavoured milk under the Goulburn Valley label, first trialled in the latter part of 2007. Even so, Pacific Beverages, with its alcoholic line up, was quite a diversification for CCA which, until 2006, had shied away from alcoholic drinks.

This sideways move has had no impact on CCA’s soft drinks performance. The company remains the top performer in the massive Australian carbonates market and a leading player in a number of other soft drinks categories, including bottled water, water coolers and sports drinks. Nor has the move into the alcoholic arena interfered with its soft drinks investment or innovation, which has subsequently included the introduction of Glaceau Vitamin Water and the highly successful re-launch of the Mother energy drink in a trendsetting 500ml metal can, both in 2008. 

Under the revised terms of the Pacific Beverages joint venture agreement, announced this month, if SABMiller acquires at least 50.01% of the Foster’s Group, SABMiller is entitled to buy CCA's interest in Pacific Beverages. In return, CCA will have the opportunity to acquire parts of the Foster's business, including its Australian spirits, RTD and non-alcoholic operations (plus its Fijian beverage interests).

Since Foster’s bought Continental Spirits, a former Seagram company, in 1999 it has maintained a wide range of spirits. Through its purchase of BCB Beverages in 2002, it has also gained access to the sizeable Australian RTD market. Whether CCA will lose the Beam Global spirits brands is debateable. As SABMiller’s real interest lies in beer, in all probability, CCA will retain this business which could continue to be sold in tandem with the Foster’s brands. Either way, the Foster’s spirits portfolio will probably have less appeal than its RTDs. CCA has been manufacturing Jim Beam RTD beverages since April 2007. The long-term sales, distribution and manufacturing agreement  announced in March this year, could see Foster’s RTD business sit alongside Beam RTDs, as long as there is no direct conflict. Then, there are the soft drinks.

Foster’s soft drinks interests are represented by the Tasmania-based Cascade Beverage Company, which is best known for its juice products, such as sparkling Cascade Apple Isle and Cascade Real Juices. The brand line-up also includes Torquay spring and flavoured mineral waters. In addition, Fosters is the Australian agent for Perrier. Total sales for all these brands combined are not great but Cascade Juices would support the Goulburn Valley juice offerings. 

In any event, the potential sale of Pacific Beverages to SABMiller, should the latter prove successful in its bid for Fosters, sees CCA ‘quids in’. CCA’s 50% interest in Pacific Beverages is currently valued at approximately AUD95m. Under the revised conditions of the joint venture it would receive between AUD305m to AUD380m from the sale. It addition, it gets to pick up some useful add-ons from Fosters.

All in all, the real winner here could be CCA rather than SABMIller.