Taking WA wine into the big league

The pending merger with Cranswick Premium Wines means a hectic schedule ahead for Evans & Tate’s Franklin Tate, but it’s a challenge he approaches with relish, as Mark Pownall reports.

TWO years ago a merger between the likes of Cranswick Premium Wines and Evans & Tate would have been a cause célèbre.

At that time Evans & Tate chief Franklin Tate would have been forgiven if he was still cracking open bottles of champagne – perhaps toasting a rocketing share price as the then euphoric market welcomed the synergies.

Times have changed, however.

In 2002, whether it be the wine industry or anywhere else, getting a merger over the line is no longer the achievement it was.

These days the market rewards those who can deliver the results of a merger, rather than simply assuming they will come.

It is obvious from Mr Tate’s demeanour that, despite six months of gruelling negotiations, the real work is yet to come. He’s even playing down one of the key results of the merger – that it puts Evans & Tate’s market capitalisation at about $100 million, the magic number needed to attract the interest of mainstream fund managers.

“It’s a good start,” he said, in matter-of-fact fashion.

But make no mistake, Mr Tate sees huge opportunities in merging the export orientated Cranswick with his domestically focused business, which will involve a significant dilution of his 41 per cent stake.

In fact, not only is it almost impossible to find an area where the two companies significantly overlap, at least one significant Cranswick share-holder told WA Business News the combination of the two operations completes the circle in numerous ways, from product price points to geographic positioning.

“There are three things the business brings which we see as core,” Mr Tate said. “The Barramundi brand, low-cost production and penetration in the UK.”

Barramundi is a huge driver for Cranswick. It sells 400,000 cases of the wine into the UK market alone, aided by a full-time distribution team and supplemented by a second strong brand, Salisbury, which sells 80,000 cases in the UK.

The UK represents 62 per cent of Cranswick’s sales, helping make it Australia’s sixth biggest wine exporter.

By contrast, Evans & Tate exports just one tenth of its product. Importantly, its concentration has been in the US, where it has established a distribution presence through the acquisition of Scott Street Portfolio Inc. Cranswick exports 6 per cent of its product to the US but has none of the infrastructure that it has in the UK.

Mr Tate sees big opportunities to push the Cranswick brands in the US and Australia.

The synergies continue. Take the price points, for example.

Cranswick’s strength is in the $7-$9 a bottle range, whereas Evans & Tate is in the loftier $10-$20 a bottle range, though brands like Redbrook extend well beyond that.

Despite all these obvious fits, like most mergers this one has not been done between equal partners.

The smaller of the two, Cranswick has had a difficult year, not least because of the collapse of its distributor Hill International.

Big write-downs resulted in a net loss of $23 million, drastically changing the merger terms from four Evans & Tate shares for every seven Cranswick shares (plus a cash component of $2.50, which remains unchanged) to a four-for-10 scrip deal.

Mr Tate said that, in the short-term, Evans & Tate was giving a bit away in return for much longer-term gains as a combined entity.

“I was reluctant to give away too much upside,” he said.

“The Evans & Tate team was being asked to lend itself to this project to make it a success.

“They [Cranswick shareholders] are getting a chance to go forward and retrieve some of the losses they have got.”

The merger, which is planned for completion by mid-February next year, puts Evans & Tate in about 7th position on the Australian wine league table, nestled among such well known names as McGuigan Simeon Wines, Yalumba, De Bortoli and Brown Brothers, but well below the four majors Southcorp, BRL Hardy, Fosters-owned Mildara Blass and Orlando Wyndham Group Pty Ltd.

Despite clearly placing in the top 10, the merger still leaves Evans & Tate among the dreaded middle rankings, the place every analyst says you don’t want to be in the wine industry.

Mr Tate remains unfazed by this.

“The reason people say you don’t want to be in the middle is probably because it is an easy thing to say,” he said.

“It doesn’t matter if you are the biggest or smallest or somewhere in the middle, if you are focused strategically and understand what customers want, you can do well.”

In this way Mr Tate tones down talk of further acquisitions until the current merger is bedded down.

“Can we get bigger again? Sure, but I want to be more profitable,” he said.

“The key thing before we make other acquisitions is improving returns on investment in this business.”

Apart from the brands strategies, Mr Tate said there were some balance sheet rationalisation opportunities (such as selling Cranswick’s two light aircraft) and a lot of room to grow the branded production side of the business. Much of this would be at the expense of less profitable processing, of which Cranswick produces 14,000 tonnes a year.

Mr Tate said his personal goal was to grow earnings per share from 6.3 cents currently to 10 cents (pre-SGARA: ie before accounting for changes in valuation in grapevine values) in three years.

That focus is why, he says, he decided to quit the board of Skywest, the WA regional airline in which he took a stake after the collapse of its parent Ansett and which has since experienced considerable corporate turmoil.

“Everything I invest in as a private individual I have to do in my own time,” Mr Tate said.

“However, all my time is spent in this [Evans & Tate] business. That is why I decided not to sit on any other boards, even though [the experience] would be good in some ways.”

p Franklin Tate will speak at a WA Business News Success and Leadership breakfast on December 4.

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