26/10/2004 - 22:00

Vultures circling in wine sector

26/10/2004 - 22:00

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One of the more interesting aspects of business is that, in order to know when the bottom of a cycle has been reached, the best place to look is up, because that is where you can see the vultures circling as they prepare to feast on the fallen.

For proof, look no further than the Australian wine sector. The past few months have produced a series of telltale indications that, after three dreadful years, better times lie ahead for wine.

The only real questions are who will survive to see the good times, when will they definitely arrive, and the corollary question of who is going to be a predator and who is prey in the emerging great wine shakeout?

At the top end of the market, Constellation Brands has put $1.33 billion on the table to declare its position as a predator. In its case, the prey is Robert Mondavi Corp, undoubtedly one of the big names of American wine, and a business with close links to well-known Margaret River vineyard, Leeuwin Estate.

A lifetime ago (well 25 years actually) Robert Mondavi strutted around Leeuwin Estate with an eager young Denis Horgan in tow.

It is ironic, sad even, that those two lions of the vineyard have had to survive their own versions of hard times. Horgan survived troubles in the 1990s.

Mondavi, who is now in his 90s, is having a horrid time as his family falls out over poor trading results and intense competition for market share.

History aside, the Constellation Brands’ bid is more than a flag in the wind. It is a red rag, which will almost certainly spark a wholesale turnover of vineyards, wine labels and entire estates.

Other signs pointing to these future events are as simple as checking bottle shop prices, where much of the ultra-deep discounting has started to fade, and a look at the share prices of the 11 remaining listed wine stocks, five of which are now trading closer to their 12-month highs than their lows – a sign that investors have rediscovered a taste for wine.

In Australia, this means that market leaders such as Southcorp, and the wine divisions (if not the entire company) of Fosters and Lion Nathan are in play – with management having to make the decision of whether they will be acquiring assets, or be acquired.

At the bottom of the market, the forces at work are identical, albeit with fewer zeros after the numbers.

Here, too, there are myriad distressed vineyard and winery businesses either for sale, or with managers pondering whether they should make the first move and buy someone else.

The key to what is about to happen (as always in business) is capital. Put another way, this is a time of the golden rule of business, which says: "he who has the gold makes the rules".

For the really small grape growers and wine producers, especially those without deep pockets, this is a time when they are likely to get an offer pitched at, say, 50c in the $1, or lower.

In other words, they are in grave danger of being picked off by the vultures who have retained (or raised) capital, and are ready to follow in Constellation’s rather large footsteps.

People likely to play a role as vulture include Frank Tate who, it is interesting to see, is raising $12 million through an issue of convertible preference shares.

The share price of E&T has been relatively flat recently but at $1.11 the last time Briefcase looked it is 18 per cent up on the 12-month low of 94c. That, obviously, is an optimist’s view.

Pessimists would say that it is 20 per cent below the 12-month high of $1.40 reached in November last year.

Another prospective vulture is Mike Calneggia at Australian Wine Holdings. An early mover in the vulture game (about two years too early) Calneggia steadily built AWH into a business with a string of labels that have survived the great downturn and should now be set for better times.

Calneggia, waving another of those positive trend telltales, said in his annual report that “the signs for financial 2005 are positive”.

More importantly, he went on to forecast that AWH would post its first profit this year.

For anyone not totally blind the signs of recovery are there to be read. Profits are recovering thanks to tighter cost controls and rising sales, there is a big ticket takeover on the table and talk of more to come, deep-discounting is fading, there is an increase in distressed assets sales (which at least shows someone is buying), Frank Tate raising money, and Mike Calneggia tipping a maiden profit.

Two messages are contained in all this evidence. One, investors in the wine industry can look forward to better times. Two, drinkers should stock up now before all the cheap stuff disappears off the shelves.


Coal prices are being very kind to Wesfarmers, which continues to scale new share price heights. Last week the stock cracked a new 12-month rolling high of $34.43, a price which is good news for shareholders, but also a level which has the potential to trigger a bit of profit-taking because it could well be as good as it gets.

A number of brokers have been busy dusting off their Wesfarmers spreadsheets recently – and struggling to see how the company maintains its earnings momentum because coal is really the only division in what could be called outperformance mode.

An example of the dilemma facing brokers, who always find it difficult to hang a ‘sell’ notice on a market darling, can be found at Goldman Sachs JBWere which loves the coal story, but is seriously worried about hardware (the Bunnings division).

In a study headed “weak hardware v strong coal”, the chaps at JBWere came up with a ‘marketperform’ advisory for the short term (that used to be a hold when English was spoken at the venerable old firm) and a ‘buy’ in the long term.

What makes both recommendations really interesting is that the advice note was written when Wesfarmers was trading at $33.70 – and JBWere’s valuation of Wesfarmers was put at $30.62.

Briefcase may be a bit thick, but how on earth is it possible to not say sell when a stock is already 10 per cent above your own valuation?


"Manners are especially the need of the plain. The pretty can get away with anything." Evelyn Waugh

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