Montana buys out Corbans

By DITA DE BONI

Wine producer Corbans found a new home with Montana yesterday, fetching substantially more than analysts had predicted and cementing the distribution and production dominance of New Zealand's largest producer.

All shares in DB Group's wine subsidiary will be sold to Montana, with stock and internal group debt transferred to the buyer for a total of $151 million. The buyer will also take over an estimated $3 million in bank debt.

The sale will be partly financed by a capital notes issue, understood to be between $50 million and $100 million. Montana would not outline the shape of that issue, saying only it would stop diluting the company's current shareholding structure.

The sale is also contingent on the approval of shareholders and the Overseas Investment Commission because of Lion Nathan's 28 per cent holding in Montana.

The merged company will be by far New Zealand's largest producer, with 60 per cent of the domestic market and the bulk of the $169 million export market.

Benefits from joint production and distribution will also be substantial, as both companies have vineyards and processing facilities in Marlborough, Hawkes Bay and Gisborne. DB Group's Brian Blake and Montana's Peter Masfen signed the deal yesterday morning after a lengthy sale process and Montana's due diligence, which lasted six weeks.

The sale process was conducted by tender, and Montana offered "the best value for our shareholders," Mr Blake said yesterday. He would not say who the other bidders were.

Industry analysts had widely valued Corbans at between $110 and $130 million, citing the division's poor distribution network in the UK and a drop in pre-tax earnings of around $2 million in the half-year result declared in May.

A PricewaterhouseCoopers valuation of Corbans in April rated the company at between $130 million and $146 million.

Mr Masfen said Montana foresaw synergy benefits from the acquisition, making the final sale price of $154 million good value.

Montana will be able to better fulfil unsatisfied export demand with the addition of Corban's output, he said. Corbans produces around 13 million litres, compared with Montana's 23 million litres. Both companies have invested heavily in expansion in the past few years, and Montana is expected to increase its grape volume by 70 per cent in the next four years.

Mr Masfen refused to be drawn on whether Montana would scrap the Corbans brand name.

"Our approach will be to take into consideration the respective brand strengths in the Corbans portfolio," he said. But there might be areas of overlap in the two product ranges.

He would also not comment on any possible trimming of the Corbans business, saying Montana would acquire the operation as a going concern and absorb all current staff. Both companies have bottling and warehouse facilities in East Auckland.

Asked if shareholders would welcome yesterday's announcement, Mr Masfen said he and Lion Nathan, which owns 48 per cent of the company between them, supported the purchase and he expected wider support would follow.

The announcement and the absence of a rights issue to cover the purchase, combined to push Montana's shareprice up 20c to a market close of 285c.

Mr Masfen has often said the price of Montana shares have been "significantly undervalued," and remained unmoved by yesterday's shareprice hike.

"With the addition of Corbans, Montana becomes more valuable, and so the gap between [real value and stockmarket value] is even wider," he said.

DB Group - which is now widely expected to be bought out by 75 per cent shareholder Asia Pacific Breweries, gained 1c to close at 331c, with offers of 335c received at the end of trade.

Mr Masfen said Montana's debt/equity ratio would not be badly affected, as capital notes were "quasi-equity" and the proceeds of divesting non-core business Go International and Truck Holdings last year would partly offset debt.

Analysts said Montana's ownership of Corbans could boost its pre-tax earnings by up to 50 per cent.

One said the move was generally positive; the only negative side-effect was the possible loss of an alternate avenue for grape growers to exploit.

But Mr Masfen disputed that grape growers would be disadvantaged, saying the Commerce Commission had considered the issue when it approved the deal this month.

"We believe the merger creates a strong international company, which will give longer-term strength and security to contractors.

It could also make our product more price-competitive for domestic consumers."

Brett Wilkinson, of Ord Minnett Securities, said the perception of Montana as a quality growth company would be further enhanced by the merger.

"I would expect that the end result will be positive for valuations - don't be surprised to see valuations above $3."