The Lion Nathan AGM in Sydney recently was about as popular as one of their newly acquired Victorian pubs which does not serve VB. But we managed to inject some reasonable debate in any case.

Even though they tried to reject my proxy on the technicality that the husband and wife team appointing me should both have signed the form, chairman Douglas Myers, the richest Kiwi on earth, let me ask a few questions.

The first issued related to the disaster that is Lion Nathan’s two breweries in China. The business turned over $47 million last year for a loss of $27 million and did similar numbers the year before.

Check out these crazy numbers: the company has production capacity of 300 million litres a year in China which is just below the 357 million litre annual Victorian market. So they are pretty big breweries but last year only churned out 70 million litres of beer which was sold below cost.

So the company has ploughed $200 million into an investment that is operating at 22 per cent of capacity. CEO Gordon Cairns admitted they needed to double revenues to break even and it wouldn’t matter if that came from volume or price increases.

Gordon said that the entire Chinese beer market is producing profits of about $US100 million a year but this is being shared between 500 breweries. Poor old Lion Nathan is stranded with no established brands fighting against uncommercial government-owned breweries in a slugfest with multinationals such as Heineken and Annheiser Busch, the world’s biggest brewer.

Lion Nathan followed Foster’s into China with most of the other world’s biggest brewers in the mid 1990s and now look like they are following them out although the write off so far is only $120 million compared with the $300 million that Foster’s wrote off.

Those multinationals hanging in there include South African Breweries, Asahi, Suntory, Heineken and AB, but most of the others have left, the most recent being Carlsberg which sold out to a local player a few months ago.

Lion Nathan’s aggressive push into Victoria was the next big issue Crikey raised at the meeting. The company’s raid on Melbourne’s trendy inner-city pub market was Crikey’s biggest scoop off the year (edition 3 late Feb) and the board was defending shelling out $66 million for 45 pubs to its shareholders. The annual report described the move as “laying siege to Victoria” after the company set “out to capture Victoria with a move worthy of the ancient Greeks’ Trojan Horse”.

Gordon is an Irishman with a sense of humor because he tried to claim as evidence that lots of CUB executives were visiting the pubs on the fact that complaints about the unavailability of Victoria Bitter were on the rise. We understand that Naughtons hotel in Carlton is running a secret unmarked VB tap from the back bar to keep some of its regulars happy.

The amount of transparency around the pub raid was surprising. Most pundits reckon they’ve gone over the top with what they’ve paid but Gordon said the scenario was as follows: Lion Nathan’s cost of capital is 11 per cent and the pubs are predicted to return 7 per cent a year based on what they’ve paid. However, if Lion Nathan can lift its Victorian market share from a dismal 13.8 per cent to 15 per cent then they will achieve the necessary 11 per cent return on capital. The signs are good so far with and the move is being supported by an $80 million 10-year sponsorship of Victorian racing which will see the Foster’s Melbourne Cup become the Hahn Premium Melbourne Cup next year.

Douglas defended the racing sponsorship indulgence after I quoted former CUB boss Nuno D’Aquino saying that Lion Nathan’s Australian boss Walter Bugno was driven by his ego because he was a horse flesh owner himself.

Dougie pointed out that Walter’s thoroughbred ownership is “very modest” and that CUB had “not been particularly good” at servicing the racing industry and that Walter still had his job whereas Nuno had been moved on. Interestingly, he also said that Victoria was not really a free market for beer and this was why they had adopted this Victoria-specific strategy. Unlike Foster’s, which runs 5000 pokies nationally, Lion Nathan is not trying to become a gambling pusher to prop up beer profits. All its pubs are pokies free venues designed to capture trendy young drinkers for life. Frankly, I used to like drinking VB at the Builders Arms in days gone by.

The other issue we raised was the question of Lion Nathan always following Foster’s and therefore not having first mover advantage. They were second into China, second into pub ownership, second into racing sponsorship and second into wine. Dougie rather disingeneously responded that they were first into beer – that was more than century ago son. The purchase of a 28 per cent stake in New Zealand’s biggest wine maker Montana has already yielded an $87 million paper profit – Sir Ron Brierley’s GPG group must be kicking itself for selling out too early and too cheaply. Ironically, the move was only taken to stop Foster’s from snaring the stake in a competitive response to the Trojan’s Horse move on the Victoria pub scene. It’s a real tit for tat game between the big brewers and it will be interesting to see if Lion Nathan takes over from McDonalds as principal sponsor on the AFL next year. Dougie says it has no present plans to do this.

Lastly, when it came to re-electing the directors, I tied to get one of the four representatives of Japanese brewer Kirin to speak to the meeting. The Japs have 46 per cent of the company after buying out Dougie’s controlling stake two and a half years ago for about $4.60 a share, still above the current price of about $4.20.

There was much criticism at the time that minority shareholders did not receive such a generous offer – something the law would have required if Lion Nathan was based in Australia at the time. Dougie’s response was that Kirin would have only bought 20 per cent because they never wanted control. One of the Kirin reps spoke but his English was so bad it was difficult to make out what he said. Sounded something like Kirin being happy with the current board structure. It is a bit odd that the company moved to Sydney with such fanfare yet still only has two Australian based directors in Gordon and Olympics freeloader Kevan Gosper. Dougie promised that another director would be added soon and suggested she’d probably be a woman – let’s hope she’s an Aussie Sheila.

After the meeting Dougie wandered over for a chat to ask if I used to work for CS First Boston. Clearly the PR flaks had not briefed him well. I’d spoken to Dougie four or five times over the years as a journalist – he even flew me to Auckland once for a profit announcement where he became the first person I’ve ever heard use the C word at a press conference. He was describing the privvy council which had made some adverse ruling against the brewer and Dougie’s line was that “I went to school with some of these c—s”. Nice one Dougie.

He was at his free-market and feisty best during out chat, saying that New Zealand was full of F—wits and Stalinists and he was moving to London next year to continue his efforts as a philanthropist.

He might have come to Sydney but for Australia’s ludicrously high personal tax rates. Too right Dougie.

After the meeting there was time for a quick beer and a few meat pies at the Recital Hall in Sydney’s Angel Place. The finance director wondered over and said most of the shareholders in attendance had some sort of Kiwi connection. He also said the holdings of Australia’s institutions since the trip across the Tasman had jumped from 10 per cent to 20 per cent and New Zealand institutional holdings had done the reverse.

A chap from CUB rang me a couple of days after the meeting to say that the email to subscribers describing the meeting had been circulated throughout the company and created much mirth. We look forward to them all subscribing as I’m not aware of anyone at CUB who has subscribed.

Peter Fray

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