Swallowing of DB ends bitter saga

By Brian Gaynor

The takeover offer for DB Group by Asia Pacific Breweries will see another well-known New Zealand company passing into foreign ownership.

The takeover will close a depressing chapter in the company's history that has seen it plundered and nearly destroyed by Brierley Investments, partly rescued by Asia Pacific Breweries and then acquired by the Singaporeans.

Unfortunately, this sequence of events has been a fairly common occurrence in New Zealand over the past decade.

The DB story began in 1929 when William Coutts and his three sons established the Waitemata Brewery in Otahuhu. The new brewery had no hotel outlets and struggled to sell its beer.

Mr Coutts approached Henry Kelliher (later Sir Henry) the owner of Levers & Co, an Auckland wholesale beer distributor. The two entrepreneurs agreed to merge their interests and in 1930 a prospectus was issued offering sterling 75,000 worth of shares in Dominion Breweries.

Dominion Breweries' capital was used to purchase Waitemata Brewery and Levers & Co and Sir Henry - the up-and- coming young Auckland businessman of the era - became managing director of the new group.

The next 40 years were a prosperous period for Dominion Breweries under the stewardship of Sir Henry. The group consolidated its dominance in the Auckland region and New Zealanders - the third highest beer-consuming country in the world - drank copious quantities of its brew. Sir Henry and New Zealand Breweries (later Lion Breweries) developed an intense rivalry to dominate the domestic beer market.

In the late 1960s the company began a major expansionary programme in competition with Lion. Breweries were acquired outside the Auckland region and the hotels under group ownership increased from 41 in 1968 to 280 in 1980.

As Dominion Breweries entered the 1980s it was badly in need of rejuvenation. It had substantial under performing property assets, a depressed share price and an ageing board of directors with Sir Henry, at 84 years of age, still at the helm.

This was the perfect situation for Brierley Investments and in 1981 the corporate raider acquired 20 per cent of the Auckland-based brewer.

The first few years under BIL's influence were reasonably tranquil and successful. The group's problems began in 1987 when Dominion Breweries merged with Magnum. The story, which becomes complicated at this stage, can be summarised as follows: By mid-1986 BIL had acquired a 51 per cent shareholding in Rothmans Industries, which was run by Bob Matthew. In September 1986 Rothmans sold its tobacco interests to Rothmans Australia and changed its name to Magnum Corporation. After the tobacco sale Magnum was cash rich with several operations including Corbans Wines.

BIL decided to use Magnum as the depositary for its liquor interests and in 1987 its shareholdings in Quill Humphreys (liquor stores and hotels), Cooks McWilliams (wine) and Dominion Breweries were sold to Magnum. Dominion Breweries shareholders, including BIL, received one Magnum share for each of their existing shares. These transactions raised BIL's shareholding in Magnum to 67 per cent.

Paul Collins explained the rationale for these mergers in BIL's 1987 annual report; "It was apparent to us that Lion Breweries' long established position as market leader was vulnerable and would be even more so if there were effective integrated competition."

Bob Matthew moved from Magnum to BIL and Lindsay Fergusson (previously managing director of New Zealand Steel) became chief executive of the liquor group. In the next few years, while firmly under the control of BIL, Magnum made disastrous investments including a 49.4 per cent shareholding in Wilson Neill and 50 per cent of Austotel, Australia's largest pub group. It also expanded into the grocery business.

In 1991, BIL sold a 27.2 per cent holding to Asia Pacific Breweries and its remaining 27.2 per cent in 1993. In between these transactions Magnum changed its name to DB Group. In November 1993, BIL's last two representatives resigned from the Magnum board leaving the Singaporeans, who currently own 58.4 per cent of DB, to clean up the mess.

The investments made during the BIL era had a huge impact on Magnum's profitability and investment performance. In 1993 and 1994 Magnum reported large losses and in the three years ended September 30, 1994, the group had write-downs and provisioning relating to these investments of $426 million and paid no dividend.

As part consideration for its sale of the Magnum shareholding BIL received a 14.2 per cent shareholding in Lion Nathan from Asia Pacific Breweries. Asia Pacific had been a long-term shareholder in Lion but lost interest when the controversial 1988 merger between Lion Breweries and L. D. Nathan diluted its shareholding.

The Singaporeans should have stuck with Lion because it has substantially outperformed DB over the past decade. At the end of 1989 Lion Nathan was the sixth largest company on the New Zealand stock exchange with a market value of $1.36 billion and DB was seventh with a capitalisation of $1.01 billion. Since then Lion's value has increased to more than $2.2 billion whereas the $2.80 per share offer values DB at only $282 million. In addition Lion has paid dividends of $735 million and DB just $141 million.

The relative performance of Lion and DB is an excellent example of how focused management will consistently outperform the wheelers and dealers.

Doug Myers acquired the Australian brewing interests of Alan Bond at the beginning of the decade and he has concentrated on making this acquisition successful. His strategy has been relatively aggressive and rewarding and Lion Nathan shares outperformed the NZSE-40 Index during the 1990s.

BIL, and DB when it was under BIL's influence, were essentially dealmakers. The continuous purchase and sale of assets can be exciting and profitable in the short term but most wheelers and dealers are left with an unconnected bunch of assets in different industries. As these assets accumulate it becomes increasingly difficult to focus on the operations of the different enterprises.

The question every investor has to ask is, Will the Stephen Tindall-type focus consistently outperform the Eric Watson- type dealmaker? Has Craig Heatley created more sustainable wealth since he concentrated on Sky Television compared with his wheeling and dealing days at Rainbow Corporation?

Although Asia Pacific has cleaned up the mess at DB the group has been permanently damaged by BIL's incompetent stewardship. In the early1990s it was completely outflanked by Lion Nathan in its traditional brewing operations. Asia Pacific does not have the expertise or desire to invest substantial resources in Corbans Wines.

Long-term shareholders will be disappointed with the $2.80 per share offer but this is as good as they will get. DB's net profit slumped from $24.6 to $11.7 million in the September 1999 year and earnings did not cover the 16c per share dividend.

Shareholders will have the opportunity to drink a final toast to Sir Henry Kelliher and William Coutts at the company's last annual general meeting in Auckland on 15 February. The meeting will be held almost exactly 70 years after the original Dominion Breweries prospectus was issued.

Sir Henry, who saw action at Gallipoli and on the Somme, must be turning in his grave. His beloved company has been completely outclassed by its archrival Lion and will slip into foreign ownership for a mere $282 million.

* Disclosure of interest: none.