Lion paying too much for its wine, say analysts

By SIMON HENDERY AND AGENCIES

Investors and analysts believe brewer Lion Nathan, foiled in its bid for control of winemaker Montana, is paying too much for wine assets in Australia.

Hard on the heels of the $A68 million friendly takeover bid it made last month for Adelaide-based Banksia Wines, Lion yesterday announced a $A7 ($8.64) a share raid on South Australian winemaker Petaluma, valuing the company at $A222 million.

The market reacted negatively to the price and Lion shares closed down 27c, or 4.5 per cent, at $5.68.

Petaluma shares were trading $A2.11 - or 42 per cent - up at $A7.11 yesterday afternoon because of speculation that a counter-offer could materialise.

Directors at Petaluma have recommended shareholders accept the offer unless a higher bid emerges.

Jacques Bollinger SA, the champagne maker, owns about 9.4 per cent of Petaluma.

Petaluma owns the Mitchelton, Knappstein and Stonier brands from wineries across Australia.

The South Australian-based company had sales of $A51 million in the year to June 30 and made a profit from operations of $A6.4 million.

Lion's thirst for new wine business is part of a rush for wineries that has already thrust other liquor companies, including rival Foster's Group and UK drinks giant Allied Domecq, into the fast-growing premium wine industry.

Last year, Foster's bought Beringer Wines Estates in California.

In August, Lion bailed out of a $1 billion takeover battle against Allied Domecq for control of New Zealand's largest winemaker, Montana.

An increase in global demand for better-quality bottled wine has boosted demand at a time when beer sales are waning.

Australia's wine exports have averaged 30 per cent growth a year in the past decade.

One analyst said Lion's bid for Petaluma looked expensive and a key question was whether the company had the management expertise to control and draw synergies from the combined smaller wine assets it was acquiring.

Lion Nathan investor relations director Warwick Bryan said the company was hiring a small team to manage the wine assets.

Another analyst said Lion appears to be paying too much for both wine investments in terms of a 18.7 times multiple of earnings before interest and tax for next year.

He said it was too expensive "if you look at it from a return of capital point of view as well".

"Pre-amortisation ... it's around a 5.3 per cent return on capital acquisition."

The analyst said the decline in beer consumption meant the move to diversify into wine was correct for Lion.



The analyst said he didn't expect Lion to make any other wine acquisitions in the short term, because of the complexities of completing the takeovers.

Mr Bryan said the purchase would be financed with existing borrowings.

"We received $500 million from the sell-down from Montana, so we can do it very comfortably without raising equity."

He declined to comment on whether Lion Nathan was in talks to acquire other wine companies.

But he reiterated that the company wanted to build "a reasonably sized wine business" using its strong balance sheet and cash flows from its beer business.

In August, chief executive Gordon Cairns said Lion needed to build a business of about Montana's size if it was to break into wine in a meaningful way.

Montana had sales of about $A250 million in the year to June, compared with combined annual sales of $A82 million from Petaluma and Banksia.

* Montana shares will be delisted from the Stock Exchange at the close of business on Monday, following completion of their compulsory acquisition by Allied Domecq.