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Posted August 2011

Australia – A po-faced Foster’s board

You have to give it to SABMiller: they have an impeccable sense of timing. A few days before Foster’s was to release its 2011 full year results, SABMiller went hostile on Foster’s by taking its AUD 9.5 billion bid (USD 10 billion) directly to shareholders, thus cutting out Foster’s management. SABMiller needs 90 percent of Foster’s shareholders to agree to ensure success.

Going hostile is a mean move. But what other option did SABMiller have after Foster's board rejected its approach as significantly under-valuing the company?

According to the London Sunday Times (21 August 2011), SABMiller’s CEO Graham Mackay had tried to ring David Crawford, Foster’s Chairman, to tell him that SABMiller was going hostile but could not reach him because the ever-so-busy Mr Crawford was in a board meeting of BHP Billiton, the Anglo-Australian mining giant where he is a director. When the meeting was finally over, Mr Crawford had to learn about SABMiller’s aggressive move from the press.

Whether the story of Mr Mackay wanting to do yet another courtesy call to Mr Crawford is true or not, it underlines what Larry Gandler, an analyst at Credit Suisse, has said recently, namely that Foster’s board made a mistake when they took themselves out of the picture. For two months they have steadfastly refused to talk to SABMiller after SABMiller had made an AUD 4.90 per share offer for Foster’s in June.

Mr Gandler added that there isn't much that the board seems to be able to do to regain control of the situation, especially now that Foster’s underwhelming results are on the table.

On 23 August 2011, Foster's reported its biggest decline in beer sales in 20 years. Foster’s reported an underlying profit of AUD 494.9 million for the 12 months to the end of June, down 8.7 percent from the previous financial year, as beer sales slumped 6 percent by volume.

In fact, after a loss on the recent demerger of Foster's wine business, Treasury Wine Estates, the bottom line sank to a loss of AUD 89 million.

Not good.

That leaves Mr Pollaers with very little ammunition to defend himself from the unwanted attentions of SABMiller. He pledged that his company would return at least AUD 500 million to shareholders this financial year, through either a share buyback or a capital reduction, and that he has set himself tough new targets - the classic stuff of a bid defence.

But will it be enough to dissuade investors from accepting a takeover deal?

Foster's shares closed on 22 August 2011 at the AUD 4.90 offer price, indicating investors do not see much pressure on SABMiller to raise its bid significantly.

To succeed, though, SABMiller may have to dangle a carrot before investors. That is, offer a bit more money. SABMiller has reportedly raised USD12.5 billion in bid finance, giving it room to hike the offer as high as AUD 6.12 per share, commentators say.

The current offer values Foster's at 12.5 times forecast EBITDA. That is around the global average for recent deals, but below other mature-market beer deals such as when Kirin bought Australian brewer Lion Nathan in 2009 for 13.1 times and InBev bought Anheuser-Busch for 13.8 times in 2008.

Ok, SABMiller can increase its bid. Whether it should, is another matter.

SABMiller, in its final bid price, will have to factor in the cost of Foster’s losing two lucrative beer licences, Stella Artois and Corona Extra, which contribute more than AUD 100 million a year to Foster's pre-tax profit, or 20 percent of total profits, according to estimates.

While there is no guarantee that Foster's would lose these licences with a change in ownership, they are such powerful contracts that any potential buyer would need to consider the possibility.

The Stella Artois beer licence is said to expire in 2012 and competitors have no doubt started lobbying the owner of Stella Artois, Anheuser-Busch InBev. The chances of Foster's keeping the licence, worth about AUD 15 million a year, are far from guaranteed.

Since the global merger of Anheuser-Busch and InBev, the new entity's strategy is to appoint one brewer in each region to manage its licences.

Right now, its beer licences in Australia and New Zealand are split between Lion (owned by Kirin) and Foster's. But AB-InBev tipped the balance in Lion’s favour when it granted Lion the licence to produce and distribute its Budweiser brands in Australia and New Zealand. Lion also has the licence for Beck’s and it distributes Corona in New Zealand.

With no other bidder in sight, time is on SABMiller's side. The whole takeover could drag on for months, thinks Mr Gandler. “We think, over the next four to five months, SABMiller will release conditions, bump its offer and relinquish the dividend to deliver AUD 5.15 in cash to shareholders, plus a 10 cent dividend.”

Looks like the battle for Foster’s will not be over any time soon.

 

USA - PepsiCo to split in two and go after AB-InBev?

PepsiCo is receiving a lot of criticism from investors these days for its insistence on continuing as a snacks and beverage company. In early August 2011, PepsiCo's shares were down 1.4 percent in the past 12 months, compared with a gain of 18 percent for its archrival, The Coca-Cola Company.

The idea - repeatedly put forth by Wall Street types - that PepsiCo should split into two and spin off its Frito-Lay snacks business, received new vigour after Kraft announced on 5August 2011 that it will split its north American grocery division (with brands such as Kraft’s Macaroni and Cheese, Oscar Mayer meats and Philadelphia cream cheese) from its global snacks business (with brands such as Cadbury chocolate, Oreo biscuits and Trident chewing gum).

Kraft hopes to complete the split by the end of 2012.

Although PepsiCo has 19 brands with USD 1 billion or more of annual sales, led by Pepsi-Cola, Mountain Dew, Lay’s potato chips, Gatorade and Tropicana juices, a severing of the two portfolios appears like a straightforward operation.

PepsiCo's CEO Indra Nooyi is a shrewd woman. Even before Kraft announced its imminent transformation, she had started playing to the gallery of analysts by pointing out during the company’s earnings conference call in July 2011 that the Frito-Lay North American snacks business might be “the best consumer-products company” if it were a “stand-alone” business.

This suggests that PepsiCo's shareholders might benefit from a split-off of the snack-foods business, given the higher valuation that Frito-Lay would probably receive.

The best structure would be a global snacks company and a global beverages company. Read on
 

Belgium - AB-InBev's U.S. woes

While the world seems to be on the brink of another financial disaster, AB-InBev gave the markets its usual spiel: all key financial figures pointed upwards in its second quarter ended 30 June 2011. Net profit rose 26 percent to USD 1.45 billion from USD 1.15 billion a year earlier, while revenue increased 8.5 percent to USD 9.52 billion from USD 9.17 billion, said the producer of brands like Budweiser, Stella Artois and Beck's on 11 August 2011.

Profit was also helped by lower expenses on tax and financing and the weakness of the dollar, since AB-InBev generates much of its sales in currencies other than the dollar.

However, volumes for the beer group grew just 0.3 percent in the quarter, with own beer volumes up 0.6 percent and non-beer volumes up 1.1 percent. Read on

 

Sweden - Oppigards Brewery and the revival of farmhouse brewing

Who would have thought that the spectacular growth of a brewery start-up would be helped by - indeed - Sweden's state-owned alcohol monopoly retailer Systembolaget? Doesn't this run counter to our long-cherished prejudice that the bureaucrats at a monopoly retailer would only like to deal with one albeit big client? Think scale, efficiencies, logistics- the whole "big is best" beer caboodle.

Sometimes reality does not live up to our preconceived notions. And Sweden's alcohol system is a case in point. Although Sweden has been a member of the European Union since 1995 where any barriers to free trade are usually frowned upon, the EU for complex political reasons allowed Sweden to keep its state-owned alcohol monopoly. So today if Swedes want to buy a full-strength beer rather than the 3.5 % ABV variety which is sold in supermarkets, they need to visit one of the 417 nationwide outlets run by Systembolaget, where 80 percent of total beer (4.8 million hl in 2009) is sold. It's therefore no coincidence that brewers' market shares have been unchanged for many years. Carlsberg is the leading player with about 30 percent of Systembolaget's beer sales, followed by the privately-owned Spendrups brewery with 19 percent.

Still, when Björn Falkeström, 44, with a start-up capital of EUR 100,000 put together his business plan for a craft beer brewery sometime in the 1990s, he knew that he had to get into Systembolaget to achieve some sort of size ... and get paid on time.

In 2011 his Oppigards brewery will sell about 6,000 hl of beer, up from 8,000 litres in 2004, the year he started brewing, which already makes him one of the largest craft brewers (30 in total) in the country.

When people think of Sweden, the picture of a countryside dotted with little red wooden houses near a lake usually comes to mind. It's in such a stereotypical Swedish idyll that Mr Falkeström, a computer scientist and MBA by training, set his brewery. The Oppigards brewery, a cluster of old and newly built dark-red coloured houses surrounded by paddocks and forests, is located on the 250-year-old Falkeström family farm in a village of perhaps 100 inhabitants, 8 km away from the nearest town of Hedemora (7,000 inhabitants) in central Sweden - which is about 150 km north of Stockholm.

Mr Falkeström mostly brews ales - his major brand is the award-winning Golden Ale launched in 2006 - which he says are not just cheaper to produce than lagers, but which also help him avoid competing against the big guys.

Obviously, his product choice has made him an imminently attractive supplier for Systembolaget. To defend its monopoly, Systembolaget has to provide an interesting portfolio of beers. Consumer satisfaction is central to Systembolaget's reason for being which means that the retailer continuously has to develop its alcohol portfolio. Approximately 15 percent to 20 percent of its portfolio is being renewed each year, so new listings are extremely important to Systembolaget. That in turn makes it relatively easy for newcomers with limited funds to enter the market. Once you are in Systembolaget, you are more or less set and done. Promotions and campaigns, which usually cost brewers an arm and a leg, are not allowed in its shops. Craft brewers just have to make sure their quality is up to specs.

Although Mr Falkeström has to enlist a logistics company to take his products 1,500 km up and down the country and directly to each of Systembolaget's outlets, this makes his a profitable and simple-to-run business. With a turnover of SEK 19 million (EUR 2 million/USD 2.9 million) and no debt, Oppigards is probably the most profitable small brewer in Sweden as 90 percent of its sales are conducted via Systembolaget, which pays him SEK 11.50 (EUR1.2/USD 1.8) for each 0.33 litre bottle of his Golden Ale delivered to the shops. Mr Falkeström laughingly admitted that he only has to write four (!) invoices a month: three to Systembolaget and one to a distributor who looks after his sales to the on-trade.

Occasionally, Mr Falkesträm, who runs his brewery together with his wife and five employees, worries over his dependency on Systembolaget. But as he says, expanding into the on-trade sector isn't really an alternative as he does not have a sales force. Moreover, doing business with the on-trade is far from lucrative in Sweden.

The more pressing of his worries is how to meet the rising demand for his beers in the future. Currently, the craft beer segment is 1 to 2 percent of total consumption in a market which is dominated by lager (97 percent and 3 percent ales). However, it is rising steadily.

Ideally, Mr Falkeström would like to sell about 7,000 hl beer per year. That's the limit of his current license, which takes into account his own available water volumes. Should he want to grow beyond that volume not only would he have to use municipal water from Hedemora, he would also have to build and run a larger sewage plant in the village - two things he does not really fancy doing.

For the time being he has to push these issues to the back of his mind. He is busy building a new brewhouse and a large warehouse. Only when these tasks are finished in the next few weeks will he find time to devote himself to his long-term options. Methodically and thoroughly. Just the way he has done everything so far.

 

USA- Red Bull cans Red Bull Cola

First Virgin Cola went pfffff. Now Red Bull Cola. Why is it that brand extension colas rarely seem to work? The latest to acknowledge defeat is the Austrian Dietrich Mateschitz, the founder of the Red Bull energy drink company. Thinking that the world was waiting for yet another cola band, this time a “strong & natural” one, Red Bull Cola had its debut in 2008 in the U.S., the home of PepsiCo and Coca-Cola. In mid-July 2011 U.S. media reported that Mr Mateschitz had finally pulled the plug on both Red Bull Cola and Red Bull Energy Shot.

Market observers over in the U.S. wondered why the brand had failed to excite consumers. Was it its unique flavour profile? The media controversy surrounding the company’s use of coca leaves in the beverage? Or was the cola’s premium price point its biggest impediment to success? A 12 oz. can of Red Bull Cola sold for around USD 1.50 in comparison to USD 1.00 or less for a similarly sized Coke or Pepsi product.

Pah, you literal-minded simpletons. Austrian marketing experts know better. Red Bull Cola losing its fizz had nothing to do with botched execution. The problem was much more fundamental than that. Read on

 

UK - Parliament to investigate Heineken over pension obligations

Mud sticks. In all likelihood the probe by the House of Commons select committee into Heineken's takeover of brewer Scottish & Newcastle amid allegations that Heineken broke promises to tens of thousands of pensioners, may come to nothing. Or rather it may come to the conclusion that Heineken actually did not dishonour its pension promises. But the fact that the UK’s number two brewer Heineken is being dragged before parliament with all the ensuing negative publicity should be enough to make Heineken’s spin doctors work overtime.

In July 2011 it was reported that the Commons' business, innovation and skills select committee (BIS) has agreed to investigate the GBP 7.8 billion (EUR 8.8 billion) joint takeover of S&N by Heineken and Denmark's Carlsberg this autumn.

It follows strong lobbying by the S&N Pensions Group (SNPG). The campaign group, which has several hundred members, says Heineken has effectively abandoned a decades-long S&N policy of providing inflation-linked pension increases. This policy, SNPG claims, Heineken acknowledged when it bought S&N.

The MPs' intervention is seen as significant because the BIS select committee investigated the controversial USD 22 billion Kraft takeover of Cadbury in 2010. While the committee’s findings are largely symbolic – the BIS committee certainly cannot revoke business deals – they can still seriously damage a company’s reputation. Read on

 

Australia – The Foster’s takeover saga continues

That’s pathetic. That’s truly desperate. Do they have nothing better to do? As investors await news about Foster’s full-year profits and a higher bid from SABMiller, Foster's CEO John Pollaers on 29 July 2012 announced Foster’s had relaunched its iconic beer business and renamed its Carlton & United Breweries (CUB) business as Carlton United Brewers.

In case you did not spot the difference between the old and the new, you will have to read the last sentence again.

CUB's history stretches back to 1824, and it is Australia's biggest brewer, making the VB, Carlton Draught, Crown Lager and Pure Blonde brands. Foster's new agenda will see it reach out to the community by presenting beer as a socially positive product, which brings Australians together, with the slogan "raised in friendship".

"The old CUB name was about the buildings where the beer was made -- the new CUB name is about the people who make the beer," Mr Pollaers said.

I am sure those Foster’s employees who have recently been shown the door as part of the brewer’s cost cutting drive will heartily agree.

Chief Executive John Pollaers said the relaunch of CUB was planned after Foster's demerged its beer and wine business in May this year.

After sharing this bit of trivia, Mr Pollaers decided to talk shop – why his company had rejected the AUD 9.5 billion (USD 10.5 billion) bid by SABMiller in June 2011. Read on

 

UK – SABMiller mum on Foster’s bid

On 21 July 2011 brewer SABMiller reported a rise in first-quarter beer volumes, thanks to continued growth in emerging markets, but kept media guessing if it will top up its bid for Australia's Fosters.

SABMiller said that underlying beer and soft drink volumes grew 5 percent year-on-year.

Price rises also helped the group to push up revenues in its April-June first quarter by 7 percent.

The company said that the jump in volumes reflected growth in consumer spending in many developing markets, and a relatively weak comparative quarter in the prior year.

SABMiller’s bosses must have been glad to be able to report upwardly mobile first quarter figures because investor sentiment cannot be too good these days.

Analysts seem to believe that SABMiller has the umph to up its bid for Foster’s. But many will have started wondering if SABMiller has handled the bidding well. Launching a takeover bid is not merely about putting your money on the table – making a bid is all about psychology and timing.

That may be the reason why 16 percent of SABMiller’s shareholders at its Annual Meeting on 21 July 2011 voted against last year's remuneration to company directors. Shareholders owning roughly 219 million shares voted against director pay, while owners of 1.2 billion shares were in favour of the pay resolutions.

This vote does not exactly represent a full blown shareholder revolt but it’s some kind of a warning to SABMiller’s top brass: several shareholders don’t think the company has handled their long-term interests well.

 

China – Heineken throws in the towel

In July 2011 Asia Pacific Breweries (APB) and Heineken sold their stakes in Jiangsu Dafuhao Breweries Co and Shanghai Asia Pacific Brewery Company to China Resources Snow Breweries (CR Snow), a joint venture of CR Enterprise and SABMiller.

APB said that the move was in line with its plan to go ahead with its international premium brand strategy and ensure its production capacities are streamlined in China.

But did not Australia’s Lion Nathan and Foster’s say the same thing many years ago before they packed up and left China for good? Read on

 

Russia – Sobering up

While Russians were out shopping for a bottle of vodka, Russia’s Parliament voted in a law which could change alcohol consumption quite dramatically. On 13 July 2011 the Russian Duma passed a tough anti-alcohol law which not only prevents the sale of beer at kiosks as of 2013, but also prohibits off-premise sales of beer during the night (between 11pm and 8am) and alcohol advertising in general. For the first time, fines for drinking beer in various public places were introduced.

Russia’s brewers wailed and gnashed their teeth. If they had hoped that beer would not be affected by President Medvedev’s clamping down on alcohol, they were hoping in vain.

While beer was once viewed as an exception to the alcohol rule, the growing concern of health experts regarding alcoholism has led to an expansion of the alcohol definition to include beer as well. Thus, the new law identifies beer as a fully-fledged alcoholic beverage. Read on

 

UK – A new lady lager?

This autumn, the UK’s number one brewer Molson Coors will be launching three new "bloat-resistant" beers marketed to women. This will be good news for women who would like to drink beer without having to throw away a full wardrobe of size 8 clothes after a night on the town.

The goal, according to the press release, is to "remove the gender imbalance that exists around beer consumption and make beer an aspirational choice for women." Hear, hear.

At least, Molson Coors seems to have come to realise that women are a vital consumer target group in a shrinking beer market. The UK beer market currently attributes just 17 percent of its value sales to females, Molson Coors reported.

The collection of three beers - clear filtered, crisp rosé and zesty lemon - is called Animée, as in the French word for "livened up", and described as "lightly sparkling and less bitter than typical lagers." Molson Coors will launch a GBP 2 million (EUR 2.3 million) advertising campaign in September to drive awareness of Animée among consumers and the trade.

It's a good thing Molson Coors spent two years developing this beer, since the world was experiencing a worrying shortage of flavourless, boring beers previously, a cynical craft beer lover quibbled. Read on

  

 

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