It may appear contradictory, but while the financial performance of the Australian wine industry has declined considerably since 1997, it will cost more than ever to buy its publicly listed assets. The Winemakers Federation of Australia (WFA) has said that in 2000 profits were the worst they have been for at least five years, equity in businesses has been reduced to 38% and been replaced by debt, liquidity has fallen and the cost of sales has increased. The WFA says the antidote can only be continued strong sales growth with adequate margins. However the push to reach critical mass in the distribution stakes has seen another frenetic bout of takeover activity. There are so few attractive mid-size options still available for purchase that the level of premium witnessed in the recent Lion Nathan-Petaluma deal is likely to become more common. In this case, Lion Nathan has offered a 40% premium on the company’s market capitalisation, and at least 16 times its EBIT. When Southcorp purchased Rosemount Estate earlier this year, many analysts believed its price of thirteen times EBIT was excessive. Fosters also paid thirteen times EBIT for Beringer, to much the same reaction. In the absence of many alternatives, other potential targets like Peter Lehmann, Evans & Tate, McGuigan Wines and Cranswick now look rather vulnerable, but only if the price is right. Two international companies with two very different reasons to have been potentially interested in purchasing Petaluma are Allied Domecq Plc and Stimson Lane. Allied successfully fought off Lion Nathan in the battle for Montana Wines in New Zealand, thereby triggering Lion Nathan’s recent spending spree in Australia. It is widely believed that it has a policy to resist attempts by Lion Nathan to acquire wine businesses. Owned by American tobacco conglomerate UST Inc. Stimson Lane Vineyards & Estate’s is Washington’s largest winemaker. Despite its net profit increase from US$3.6 million to US$7.6 million for the first six months of fiscal 2001 and a 44% premium on predicted net income growth, and the fact that it is already involved in a production and distribution joint venture with Petaluma largely focused on the Bridgewater Mill brand, Stimson Lane did not make an offer for Petaluma. One can only assume that having looked closely at the Petaluma situation, neither Allied nor Stimson Lane thought the price offered by Lion Nathan was worth it.
