The Shoeshine Column: Lion CEO gets that hunted feeling again

Friday 5th October 2001

Gordon Cairns, the genial Scot who runs Lion Nathan, doesn't strike you as the sort prone to attacks of vague anxiety. Even so he must by now be developing a certain hunted feeling.

Having already been slated by analysts for paying too much for its foray into Australian listed wine companies, Lion now faces the prospect parties as yet unknown will force it to pay prices even higher, perhaps even to the point where it has to walk away again, as it did with Montana.

It was hard not to discern a certain sadistic relish as Montana victor Allied Domecq refused to comment this week on whether it was the on-market buyer of shares in both of Lion's acquisition targets, Banksia Wines and Petaluma.

Speculation Allied was coat-tailing Lion was ignited by the fact Allied's global broker, Goldman Sachs, was the stock-seeker and had gone about its business in an uncharacteristically noisy manner. Allied corporate affairs director Jane Mussared said simply "Australasia is a target."

Given the ill-feeling generated during Allied's prolonged struggle with Lion for control of Montana, her Sphinx-like response may be nothing more than a form of pay-back, keeping Lion sweating. After all, Goldman on Monday picked up only 40,000 Petaluma shares.

Nonetheless Lion is now well and truly on its mettle to go about its wine harvest in a manner that will enrich its shareholders. If it can't do that it should stick to brewing beer and let others pay silly prices for Australia's plentiful stock of pipsqueak wine producers.

The company has been forced to change its tune since 1995, when it greeted arch-rival Foster's expansion into wine with barely-concealed derision.

At that time it insisted wine producers were ludicrously over-priced and said it would stick to its knitting in beer, where organic growth would furnish its shareholders with far better returns.

Foster's relative outperformance since then is attributable largely to its wine investments. The latest of a string of acquisitions was the $A2.9 billion buy of California's Beringer Estates, which it has folded into Beringer Blass, "the world's third most profitable wine company," according to Foster's.

In the June financial year Foster's wine division earnings before interest and tax (ebit) were $A342.1 million or 40.9% of the group total, up from 23.7% the year before.

The division's funds employed were $A3.72 billion, or 59.6% of the group total, up from 34.3%.

Lion was still singing the same stick-to-our-knitting tune as late as 1999, when it first appeared on Montana Wines' share register.

Even that move was supposed - Lion has never denied it anyway - to have been prompted by Fosters' alleged interest. And it wasn't a sudden attack of vinophilia. Lion had beer and spirits distribution interests to protect.

It wasn't until Allied Domecq appeared early this year as a competitor for Montana that Lion began to talk about a "wine strategy" but it continued arguing the sector was overpriced.

At the release of the half-year financial results in May it said it "recognises that the pricing of some wine assets make it difficult to create value for shareholders. In this environment Lion does not plan to overpay for strategic assets."

It made the best of its Montana defeat, heading its August press release: "Overbidding Allied would not create value for Lion shareholders."

Lion valued Montana at between $3.20 and $3.80 a share. Allied paid $4.80 for the major part of the company.

Cairns said Lion "remains committed to a wine strategy" and had identified "a number of specific options that we are progressing."

However, he said, "we are prepared to be patient as we believe wine asset prices will come under pressure from increased domestic competition, slowing export demand, and excess wine supply."

Given Lion's commendably cautious approach analysts are now scratching their heads about its Banksia and Petaluma offers.

For one thing, Lion's patience has proved short-lived. Cairns' last comment was made only six weeks ago.

For another, neither offer looks like a bargain for Lion.

Banksia reported a June-year net profit of $A2.4 million on revenue of $A31 million. Total assets were $A76 million.

Petaluma's August-year profit was $A6.8 million on revenue of $A52.6 million and assets of $A171.4 million.

So Lion proposes to pay $A290 million ($354 million) to buy $A9.2 million ($11.2 million) of net earnings and $A247 million ($302 million) of assets. That's a lot of goodwill.

To put it another way, Montana's 2001 ebit was $54 million. As Lion pointed out in its August release, that was well below the $75 million PriceWaterhouseCoopers had predicted only a few weeks before.

That ebit figure worked out to 25c a share, so at $4.80 Allied has paid 19.2 times historic ebit, a figure Lion reckoned was far too high.

So why is the brewer offering 19 times Petaluma's projected 2002 ebit? Is the highly profitable and strategically important Montana really worth so much less than the far smaller Petaluma?

Lion got around $500 million for its Montana stake and booked a $127 million pre-tax profit. It's to be commended for not being sucked into paying too much by another bidder but it has to be said it bought its initial shares at around $2.15.

It has no cheap stakes in Australian listed wine companies, it has set the bar far too high to begin with, and it has now attracted the attention of potentially more deep-pocketed players.

So its Montana fortunes are unlikely to be repeated. Time for Cairns to start exercising some of that alleged patience.

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