Players manoeuvre with Foster’s in their sights Adele Ferguson

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An agreement in principle between SABMiller and Coca-Cola Amatil to dissolve their local beer joint venture pending a takeover bid by SABMiller for Foster’s Group has turned speculation to the next chapter in the bust-up of the country’s biggest beer and wine group.
This column reported last month that SABMiller, one of the world’s largest brewers and which has a small presence in the Australian beer market through its Pacific Beverages joint venture with Coca-Cola Amatil (CCA), had spent the past few months working with lawyers to sort out legal and commercial issues relating to its joint venture with CCA that had prevented it making a lone bid for Foster’s.
That in-principle agreement, which will be triggered only if SAB bids for Foster’s, is understood to include SAB paying CCA a sum of money, which some believe could be as high as $350 million, as well as walking away from its 50 per cent stake in the business and the $120 million Bluetongue Brewery in New South Wales.
Advertisement: Story continues below While such a deal would make CCA a tidy one-off profit, it loses some of its blue sky growth. It would also lose a powerful partner at a time when CCA’s lucrative co-pack agreement with Jim Beam is under threat following a decision made in December by Jim Beam’s owner Fortune Brands to sell its global spirits arm.
The sale of Jim Beam wouldn’t trigger a loss of licence with CCA, but if Diageo or Pernod Ricard, the front runners to buy Jim Beam, acquired the spirits giant they would want to get the brand back as soon as possible and run it through their own distribution system with their other brands. For CCA, this would mean a pay-out for the licence or a wait until the contract expired.
The talk from a number of industry sources is that informal discussions have already begun between one of the bidders for Jim Beam and Australian distributors about a new distribution agreement.
An industry estimate of the co-pack margin earned by CCA is $15 million. To lose this would not only hit its bottom line, but would impact the economics of its alcohol distribution platform as it would struggle to cover its overheads without it.
With so much potential change, it will be interesting to see if CCA boss Terry Davis makes any statements about its alcohol strategy when he releases the profit results of the food and soft drinks giant tomorrow.
Against this backdrop, the big question is whether SABMiller, or another potential bidder, pounces on Foster’s before or after it releases its scheme booklet in late March. Whatever the case, a demerger appears to be more complicated than most had believed given some poor management and board decisions at Foster’s over the past couple of years, including a decision to push on with the roll-out of a single integrated platform, known as Project Core Operations, across its beer and wine business, even after it announced last April it would demerge the two businesses and list them separately on the ASX.
Instead of adjusting the roll-out from an integrated platform to two separate platforms back in April, Ian Johnston and the board proceeded with a common platform. This decision is the key reason why the beer and wine businesses will remain joined at the hip until June 2013. More importantly, it will cost Foster’s $42 million to separate the IT platform. Its overall costs of demerging, $150 million, are far greater than other demergers such as that of PBL, which was less than $40 million.
It also makes it more complicated for a bidder to buy the beer or wine business because the core operation of both businesses, including orders, delivery, receivables and sales, are enmeshed on the one platform.
It is highly speculated that private equity operators TPG and KKR are interested in the wine business. Any bidder will need to have a good relationship with the owner of the beer business due to the integrated platform.
No matter what advice Johnston and the board received about the platform, the buck stops with them. What they did is akin to renovating a house only to decide part way through to sub-divide the house – but instead of modifying the renovation, they waited until the end and then worked out how to split it. Reports might show it saves money or is quicker, but the brutal reality is a demerged company won’t be truly separated for two years. Interestingly, Foster’s head of IT left in December. It seems the board, headed by David Crawford, not only botched the front end of Foster’s but also the complicated back end.
It is no surprise then that a wall of scepticism has emerged over Foster’s recent notch-up in beer market share. Despite company denials that it wasn’t due to discounts, the beer division sold more volume on promotion. Mutterings around the traps were that it was throwing in 18 cartons of beer as a bonus for every one pallet.
Industry sources say that in October, November and December price realisation for Foster’s was zero, versus 3 per cent for Lion Nathan. Promotional stunts are not sustainable and have prompted talk that it is fattening the pig for market day.
It would have been much cleaner, easier and fairer to shareholders if the company had announced a demerger and a trade sale at the same time to flush out the best deal. But then again, that might have alerted the market to some of the poorer management and board decisions. But in typical Foster’s style, key directors are part of the new demerged entities.