Australia | Apr 17 2007
By Greg Peel
Australians are pretty particular about our beer. Sure – we may occasionally try one of those fancy-pants new boutique brews just for a change, or occasionally something exorbitant from a far-flung shore, but at the end of the day we will always return to that cheap, reliable brand we’ve known and loved for years. Even if is virtually devoid of flavour.
Such it is that the New South Welsh might favour a Tooheys, Queenslanders a Fourex, West Aussies a Swan, South Aussies a West End, Victorians a Carlton and Taswegians a Cascade.
This is the dilemma facing Australian beer market aspirant Coca-Cola Amatil (CCL). All the above popular brands are owned by either Lion Nathan (LNN) or Foster’s (FGL). With the exception of the odd boutique independent success (Coopers, for example), just about every popular peripheral brand in Australia is owned by these two brewers as well.
But nonetheless, Coke has indicated its desire to expand out of soft drink, juice and water dominance in this country and take on the lucrative beer market. To that end it entered into a joint venture arrangement last year with global beverage giant SABMiller called Pacific Beverages. Together the JV markets SABMiller brands Miller (American, therefore love on a beach), Peroni (occasionally drunk at Italian restaurants) and Pilsner Urquell (who?). To date the brands have achieved an Australian market penetration of 0.13%.
Even if Coke/SAB were to throw millions of dollars into a marketing push of these three brands, note the analysts at JP Morgans, it is unlikely it would ever achieve any level of success. The international premium beer market may be growing by 15-20% per annum in this country, but it still only manages an overall market share of 4.5%.
Nevertheless, JP Morgan is convinced the reason behind the joint venture is for Coke to enter the mainstream Australian beer market.
The analysts have conducted an extensive range of simulations based on the assumption Coke does throw money at the task. Given Coke has a distribution network, but no “brand equity” for its beer, the analysts assume the JV would need to invest $30-40m per annum in marketing over 5-7 years to reach a sustainable 10% market share. This would dilute earnings, and no result would be seen until after that time frame.
Moreover, the likely response from Lion Nathan and Foster’s would be a discount war, which would render any achieved market share as providing little material impact to Coke’s bottom line. The only likely result would be a fall in valuation of the duopoly’s long term valuations, which may be something that might cause Foster’s and Lion Nathan shareholders to be a tad nervous tomorrow, JP Morgan notes.
Another possibility, suggests JP Morgan, is that Coke announces tomorrow the acquisition of an existing small premium beer brand such as Bluetongue, which currently enjoys 0.6% of the premium beer market. What is definitely expected is that Coke will announce it has secured support in its push from retailers Woolworths (WOW) and Coles (CGJ) who would like to see (somewhat ironically) the brewing duopoly broken. Either way, the analysts expect an aggressive announcement of Pacific Beverages’ intention to smash into 10% of the local beer market.
JP Morgan can only see such a move as a waste of time, effort and money.
What would make more commercial sense, the analysts believe, would be an all-out Pacific Beverages takeover offer for either Foster’s or Lion Nathan. As Japanese brewer Kirin is unlikely to sell its 46% stake in Lion Nathan, Foster’s has to be the target.
This would be no mean feat, given that since the acquisition of Southcorp Foster’s is, well, rather enormous. Nevertheless, JPM suggests the joint venture could pay up to $8.00 per share.
Pacific Brands could then on-sell the Wine Trade business, the analysts suggest, while retaining a distribution agreement with the buyer. Or it could split up the company and offer scrip in a separate Wine Trade vehicle. Funding could be achieved through a combination of debt and equity contributions from both Coke and SABMiller. Coke could draw down on the excess capital in its balance sheet and issue further shares.
If Coke pulled it off, JP Morgan sees significant earnings accretion, an unrivalled position in beverages distribution in Australia, and significant enhancement of Coke’s free cashflow generation.
There is every chance that whatever Coke announces tomorrow will result in immediate and overreactive share price weakness in both Foster’s and Lion Nathan, the analysts suggest. This would provide the perfect opportunity for Pacific Brands to make its move.
Stand by for Beer Wars.