Fosters’ splitting headache

In one of the least surprising and most long awaited shock announcements, Foster’s is to split into two separately listed beer and wine businesses.

This pretty much brings to an end the financial carnage emanating from Foster’s purchase of Southcorp Wines for $3.7b back in 2005. This was a classic case of overestimating synergies (and commitment bias, whereby the firm paid $400m than their initial offer rather than walk away from the deal). The firm’s original estimates were for $270m-300m in efficiency gains within the first three years.  These never seem to have eventuated, and the firm got hit with a further whammy in terms of the Aussie dollar heading in the wrong direction (and rendering the export business much less competitive).  The firm has written down a huge chunk of the value of it’s wine assets (including another $1.1b yesterday).

One valuation has put the value of the wine business at around $2.1b – which isn’t a great outcome given Foster’s also bought Berringer Wines for $2.5b back in 2000. The devaluation is no shock given the glut in grapes and weaking competitiveness of Aussie plonk.

So much for diversification reducing risk!

What will be fascinating is what happens to Foster’s Beer Arm when this split finally comes to fruition. The Aussie beer market is a very appealing, low risk, consistent margin market (at least for the two big players).  It is very possible we’re going to see Foster’s under the acquisition microscope, with almost every big brewer other than Kirin (who own Lion Nathan) possible suitors.

As I’ve said before, Moors Colson, SAB Miller and Anheuser-Busch Inbev could all squeeze Fosters’ into their global portfolios quite nicely.  Asahi may also want access to the profit taps of their Japanese rival (and presumably won’t cop too much grief from the regulators about their existing soft-drink assets down under).

The dark horse in all this might still be Coca Cola Amatil, although their announcement this week that their young Aussie beer business is in the red might reduce their enthusiasm.

Interesting times indeed.

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More froth in Aussie beer market

It’s been pretty quiet around here (and out there in the real world) on the beer business discussions. You might remember the excitement earlier this year about a possible shake-up on the Australian scene. Lion Nathan were chasing Coca Cola Amatil, and Japanese brewer and soft drink maker Asahi was about to take over Schweppes. The latter did happen, while the former deal was scuppered.

Now it seems Lion Nathan’s major shareholder, Japan’s other big brewer Kirin, has had enough of minor shareholder status, and is seeking to take complete control of Australia’s second largest brewer. A cashed Kirin-run Lion Nathan could make for interesting times down under and hopefully even open warfare with Fosters. Unfortunately the Kirin stable of beers isn’t extensive, but they may at least get more aggressive in their pursuit of new consumers. It is also possible they will treat Australian/NZ as a cash cow as the pursue more faster growing markets in the Asian region (i.e. China).

Irrespective it’s nice to see some movement around the bar…

Whose shout is it again?

Here is a handy summary of the manoeuvring in the Australian drinks markets in recent months. The current offers on the table are:

– NZ brewer Lion Nathan (46% owned by Japanese brewer Kirin) pitching for Coca Cola Amatil (who bottle and distribute soft drinks and beers and are roughly 30% owned by US firm Coca Cola Company) (discussed earlier here).

– Japanese brewer Asahi bidding for the Aussie Schweppes business (but potentially scuppered by Coca Cola Company) (discussed earlier here).

The Asahi offer throws up the possibility that the firm may either expand its relationship with Aussie brewer Fosters’ or go head to head with them. The firm claims to be biding its time until Fosters’ sorts out whether it wants to stay in the wine business.

Meanwhile, a raft of potential international bidders remain on the horizon for Fosters’ beer business if they can dump the less profitable (and less stable) wine arm, including Moors Colson, SAB Miller, presumably the aggressive Anheuser-Busch Inbev or even Coca Cola Amatil (if they can survive the Lion Nathan bid).

This is well and truly a game of chess in terms of the moves and countermoves we are likely to see over the next 6 months. The wild cards in the pack are (i) the competition regulator in Australia (the ACCC), who might deem any one of these current proposals (or any move by Coca Cola Amatil) unacceptable on the basis that rivalry will be reduced,and (ii) the Foreign Investment Review Board could deem an international acquisition of Australian assets to be outside the national interest. The latter is extremely unlikely given the current level of international involvement.

It still remains very unclear whether if there are clear and valuable synergies here.

Are there genuine economies of scope between the distribution of soft-drinks and beer?

Fosters’ experience seems to indicate that the wine and beer don’t mix well, despite sharing the same retail outlets.

Why would we expect the non-alcoholic and alcoholic product lines to gel any more effectively?

Or, in the end, is this just a simple grab for a currently very profitable, oligopolistic Aussie beer market?

More beer shake-ups down under

As I flagged in yesterday’s post, the Australian beer industry looks a prime target for takeovers by international players, as it highly profitable and fairly isolated from the major international brewers. There has been much talk about a potential takeover of Foster’s by one of the big global players, such as Molson Coors (who have recently taken a 5 percent holding). Well, today, we’ve seen the other big player in the Aussie market, Lion Nathan make a bid for Coca Amatil.

This is a rather complex international business scenario (please bear/beer with me).

Lion Nathan were originally a merger of New Zealand’s two biggest domestic brewers. They subsequently became a major presence in Australia in 1990 via the acquisition of the nation’s second largest bundle of brewing assets (principally Tooheys and Castlemaine Perkins). Their brands currently represent just over 40 percent of the Australian beer market. Over time, the major shareholder of Lion Nathan has become Japan’s second largest brewer, Kirin (itself part of the Mitsubishi group). Kirin currently hold a 46 percent stake in Lion Nathan. Kirin also own National Foods, Australia’s largest dairy and juice company (acquired via Kirin’s holding in Filipino brewer San Miguel.

Coca Cola Amatil (CCA) are the bottlers and distributors of the ubiquitous black fizzy stuff in Australia, New Zealand, Fiji, Indonesia, Papua New Guinea, and South Korea. They also have their fingers in the bottled water, juice, canned fruit and coffee markets down under. They recently entered a joint venture with global brewing giant SAB Miller to distribute a couple of major labels in Australia (Peroni and Miller), and also took over a fledgling craft/microbrewer Blue Tongue. The major shareholder (at around 30 percent) in CCA is The Coca Cola Company back in the US (the folks who own the Coca Cola brands)

So is this the consolidation and acqusition play we expected? And is it all about beer assets?

That’s the tricky question here. The CCA/SAB Miller joint venture was supposed to see some competition for Foster’s and Lion Nathan, as CCA’s distribution network into retailers should have overcome the typically high barriers to entry in the market (alas, beer vending machines were fairly unlikely under Australian liquor licensing laws).

If Lion Nathan were successful in acquiring CCA we would be back to square one in terms of competition in the Australian beer market. It is hard to imagine Lion Nathan placing too much emphasis on the minor Peroni, Miller or Bluetongue brands. They may find some use for the CCA distribution network however.

It is more likely that this is a bigger food and beverage story. Kirin would be building a very considerable holding in the non-alcoholic beverages segment if it ended up owning both CCA and National foods. The extent of complementarities of assets across the alcoholic and non-alcoholic beverage segments is still unclear, but market power is market power, and this new beast would be wielding a hell of a lot of it with Australian retailers.

This tale highlights the complexity of telling (and researching) single-industry stories, at either the domestic or international level. The reality is that firms often reach across markets, in terms of both products and countries (I have not even mentioned the additional burden of wine holdings for the Australasian brewers). Trying to untangle motives is a real challenge for scholars (and competitor firms).

It will be intriguing to see the next move in this chess game. The big international brewers are surely still circling.

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