Gaynor: Why Lion must fight for Montana

By BRIAN GAYNOR

The bitter struggle for control of Montana is just warming up.

Lion Nathan has been thoroughly outflanked by its arch-rival, Foster's Group, and cannot afford to lose its grip on New Zealand's largest wine company.

The loss of control would be a psychological blow to Lion and a big setback to its diversification plans. It would also condemn the group to a permanent second position in the Australasian brewing stakes.

Lion entered Foster's territory in October 1990 when it bought 50 per cent of National Brewing from Bond Corporation. National's main assets were Castlemaine (XXXX brand), Swan Brewing (Swan and Emu) and Tooheys (Tooheys).

On June 30, 1992, Lion bought the remaining 50 per cent to give it full control of Australia's second-largest beer group.

Lion immediately became involved in a vicious dogfight with Foster's over market share. Neither group was in a particularly strong position - Foster's had been controlled by John Elliott during the roaring 80s and National Brewing by Alan Bond - but Foster's gradually obtained the upper hand.

Lion's market share in Australia fell from 46.3 per cent in 1993 to 42 per cent in 1996 and dipped below 40 per cent a year later.

Before it took full control of National Brewing, Lion forecast net profit for the combined group of $NZ220 million in the August 1994 year. This figure has never been achieved and the company's highest net profit is the $$214 million it recorded in 1995.

But while Lion and Foster's were fighting tooth and nail for market share, another phenomenon was affecting the industry, namely a sharp decline in beer consumption on both sides of the Tasman.

New Zealand's annual beer consumption has fallen from 120 litres to 80 litres per head since 1987. Wine consumption has risen from 15 to 19 litres a person over the same period. Australia's trend has been similar, and both countries have slipped down the world's beer consumption ladder.

The two companies tried to combat the decline by moving into China, where per head beer consumption is 80 per cent lower than Australasia. Foster's took the first step in November 1993 and boasted that it would be making as much beer in China as in Australia by 1999.

Seventeen months later Lion took a 60 per cent controlling interest in the Wuxi brewery in the Yangtze River Delta area.

Both investments have been disasters, but Foster's reacted quickly and restructured its Chinese operations before the losses became excessive.

It also made the important decision to move into the wine industry. In February 1996 it acquired full control of the listed wine producer Mildara Blass. It also took over Rothbury Wines that year.

These investments have enabled Foster's to stretch ahead of Lion and to attract substantial shareholder support.

Foster's EBIT (earnings before interest and tax) has soared from $A363 million in the June 1996 year to $747 million in the last December year.

Wine is the star performer and now contributes nearly one-third of the EBIT. Lion's EBIT has declined over the same period.

Foster's strong performance has been reflected in its sharemarket rating. Since June 30, 1996, its sharemarket value has grown from $A4.3 billion to $10.1 billion, BHP has sold its 36.5 per cent shareholding to institutional and private investors, and its total number of shareholders has grown from 67,600 to 148,300.

Lion's market value has gone from $2.1 billion to $2.7 billion over the same period, Kirin has obtained a 46.1 per cent holding and the shareholder numbers are down from 17,700 to 9800.

Lion has been completely outplayed by Foster's, mainly because of its wine investments, and Doug Myers and his fellow directors effectively threw in the towel when they rushed to accept Kirin's offer in 1998.

Gordon Cairns, Lion's chief executive, has done a good job recovering beer market share in Australia.

But he has had his back against the wall because the Sydney-based group has a weak strategic position with a large loss making operation in China and a heavy dependence on the declining beer market.

Lion made its first move on the wine industry in May last year, more than four years after Foster's, when it bought 20 per cent of Montana at $2.30 a share. In August, that was increased to 28 per cent, mostly at $2.60 a share.

Why was Lion so timid? It could have made a full offer and acquired 100 per cent of Montana for less than $4 a share a year ago.

Lion was amazingly indecisive considering wine companies were attracting plenty of suitors, Foster's had obtained huge benefits from its investments in the industry and the Melbourne-based company was completing the acquisition of Berger Wines in California for $A2.9 billion.

On November 24, Lion notified the exchange it wished to increase its Montana holding from 28 per cent to 51 per cent. The brewer was prepared to pay between $3.20 and $3.80 a share, but a PricewaterhouseCoopers appraisal report concluded the shares were worth between $4.16 and $4.64 each.

Nothing further happened until after the sharemarket closed on Wednesday, February 7, when Allied Domecq announced it was making a full takeover offer for Montana at $4.40 a share. It could buy the first 19.9 per cent on February 8 and the remaining 80.1 per cent beginning on February 9.

Several events followed in quick succession:

* Before the market opened on February 8, Lion said it would increase its November 24 offer to a price range of $4.65 to $4.80 a share and would begin buying Montana shares on Monday, February 12 (the earliest it was allowed under stock exchange rules).

* Lion applied for and was granted a waiver to start buying shares on Friday, February 9.

* On February 9, it announced that it had acquired 18.2 per cent of Montana at $4.65 a share, to bring its total shareholding to 46.5 per cent, and would stand in the market to acquire a further 4.5 per cent.

Lion has since increased its Montana holding to 62.3 per cent and Allied Domecq has 26.8 per cent.

The stock exchange established a standing committee to determine whether Lion and its brokers, Credit Suisse First Boston (CSFB), had jumped the gun by transferring shares before February 9.

In a highly critical report, released on Tuesday, the committee concluded that in all 17 of the cases investigated, representing 10 per cent of Montana, Lion/CSFB had breached exchange rules by transferring shares before midnight on February 8.

Lion is now considered to be a defaulter and Montana's independent directors must decide whether they will force the brewer to sell the 10 per cent identified by the standing committee or all 62.3 per cent acquired so far.

Lion will fight this battle inch by inch and has enough ammunition, in the form of poorly drafted exchange rules and Montana's public support for Allied Domecq, to put a strong case.

The outcome is very important to the group from a strategic and psychological point of view. Lion has been outflanked by Fosters and has very limited support from institutional shareholders.

To obtain widespread investor interest it has to show it can diversify from the declining beer market and establish a winning streak.

But in the final analysis its handling of the Montana takeover has been inept, and is a continuation of the group's second-rate performance over the past five to 10 years.

Credit Suisse First Boston, has been seriously embarrassed by the standing committee's report and will not be placing tombstone ads extolling its advisory role in the takeover debacle.

* Disclosure of interest: Brian Gaynor is a Lion Nathan shareholder; as a consequence of an indirect interest in Montana he provided a statement which formed the basis of the complainant shareholder's appeal to the stock exchange.

* bgaynor@xtra.co.nz