Lion abandons the chase

Investors are backing the brewer's decision to give up Montana and switch to less costly prey, writes DITA DE BONI.

The struggle for control of New Zealand's largest winemaker is over after more than six months of pitched battle.

Transtasman brewer Lion Nathan, having come tantalisingly close to winning outright control of Montana Group, has thrown in the towel.

Victory goes to Bristol-based liquor giant Allied Domecq, and Lion has turned its attention to Australian wine.

By surrendering the fight for control of Montana, Lion gets $127 million in pretax profit from the sale and frees $640 million to invest elsewhere.

It is understood to be already negotiating with several unlisted Australian wine companies.

Montana effectively becomes part of the world's second-largest spirits empire as a result of yesterday's announcement that Lion would sell its hard-fought 43 per cent stake in the company to its long-time British rival for $4.80 a share.

It is thought to be only a matter of time before most shareholders accept Allied's offer, which closes next Friday. Allied needs more than 90 per cent of Montana to then move to compulsorily acquire the company.

Allied is then expected to remove Montana from the New Zealand Stock Exchange, depriving it of one of its star performers of the past year.

Markets responded well to the news of Lion's exit. Its stock price gained 30c to $5.65.

This week, capital markets indicated a reluctance to support a cash-raising exercise by Lion to finance a possible bid for 100 per cent of Montana.

Ratings agency Standard & Poor's, for example, warned that the brewer would have to raise a substantial amount of equity to be able to maintain its credit rating and make a full offer for Montana.

Lion was expected to offer between $4.90 and $5 a share to outbid Allied.

That would have been a substantial premium on PricewaterhouseCoopers' recent valuation of between $4.28 and $4.72 a share, which many analysts considered to be itself overly optimistic.

Lion's reassessment of its involvement follows a string of legal defeats as it aimed to reclaim stock lost as a result of breaching listing rules in February.

Montana also released a slightly depressed full-year result.

And it is understood that Japanese brewer Kirin, Lion's majority stakeholder, put the final kibosh on Lion's plans to bid for 100 per cent of Montana, preferring to walk away with the $127 million profit.

While the battle-weary parties have had talks in the past two weeks, they were unable to reach a compromise. Jane Mussared, Allied's woman on the spot in New Zealand, this week returned to Bristol for an executive meeting, which suggests the liquor conglomerate was unaware Lion would capitulate so soon.

Perhaps understandably, Lion Nathan was not talking the language of defeat in statements yesterday, instead painting its surrender as a rational business decision.

Chief executive Gordon Cairns said the decision to sell the 43 per cent Montana stake to Allied at $4.80 "[creates] significant value for Lion Nathan shareholders".



"In order to acquire the company we would've had to pay a weighted average price of NZ$4.16. There's no way at that price we could deliver value to our shareholders. The business simply isn't worth it."



He said Lion had identified "a number" of possible wine acquisitions in Australia, thought to be unlisted wine companies, but he did not give details.

"As a result of this sale, Lion Nathan is in a strong financial position. The strength of our balance sheet and the robust cash flows from our existing brewing businesses will enable us to make more of future growth opportunities in the Australasian wine industry.

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

But Australian analysts were yesterday uncertain that Lion had done the right thing.

One Sydney-based commentator, who did not want to be named, said his initial reaction was one of concern. He said there were not that many wineries in Australia available at reasonable prices.

But New Zealand analysts appeared to be more relaxed with Lion's decision. Most described it as prudent.

Simon Botherway of Arcus Investments said Lion had made a disciplined decision, and the company had taken into account the best interests of its shareholders.

"Those sorts of decision are always welcome, and are not made often enough. Lion must have given it a lot of thought and I like the thought they've been disciplined and not been drawn into an ego battle."

Macquarie Equities senior investment adviser Arthur Lim said that overall, Lion's sale of its shares to Allied was an "excellent transaction for New Zealand".

"I really believe other wine companies will benefit from what's happened, because with funds freed up from this stoush, investors will be prepared to take risks and back other wine companies.

"It's great that they've been able to get so much added value from a New Zealand-managed company - its not as if it's gone for a steal."

Wine writer Paul Tudor, who spoke to Villa Maria, Orlando Wyndham NZ and several others shortly after Lion's announcement, said that for many smaller local wine producers, yesterday's outcome was "probably the best".

"Here we have a company that is charging around the world buying wineries and they now have control of our flagship brand.

"The effect, I predict, will be a little like Cloudy Bay, which is stocked in just about every market in the world and which has the impact of creating a New Zealand section in bottle stores.

"Allied Domecq has much greater scope in worldwide distribution than Lion and brings much more to the table, as far as furthering the brand 'New Zealand Wine', than Lion were likely to do."

Tudor said Allied "could be just what we need at this stage of our wine history".

"My only concern is that Allied stick to the task at hand. Clearly, with their spirits division static or fairly static, they had to take a bold step in another direction."