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The Shoeshine Column: Heineken holds key to DB's future

Friday 17th March 2000

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Is DB Group planning to brew Heineken here for the Australian market? Has that anything to do with Asia Pacific Breweries' takeover bid? Will the $2.80 offer price be raised?

There is no indication the answer to any of the above questions is yes but that has not stopped the rumours, which have driven up DB Group's share price to several cents above APB's offer.

At least one bidder unrelated to major shareholder APB is standing in the market for any and all DB scrip at $2.85 and is already believed to have picked up more than 100,000 shares.

Shoeshine already has suggested Singapore's APB, controlled by Dutch brewer Heineken, would find shareholders unwilling to accept its $2.80 a share takeover bid. Three dollars was more like it, and APB would have to sweeten its offer to that if it wanted to take the company private, thought he.

At the time of writing last week, APB had moved from its long-held stake of 58.4% in DB Group to 62.2%. One week later and the latest substantial securityholder notice shows it has crept up to 63.7%.

APB is a long way from reaching the 90% of outstanding shares it needs to make a compulsory acquisition. APB is unlikely to acquire many more at $2.80 considering the shares have not closed below $2.85 this week. As long as other buyers are willing to pay more, presumably to sell to APB once it has improved its offer, the main bidder is going to find the process tough.

Its hope of having the deal wrapped up by a self-imposed deadline of March 27 looks optimistic to say the least and Shoeshine would be surprised if many large investors accepted.

One merchant banker whose clients hold a substantial number of shares has advised them not to sell. "I think [APB] are being a bit stingy. If they had paid $3 to start with they could have had the whole company by now."

Surprisingly, considering shareholders' desire to maximise the price for their stakes, there appears to be a general derision of the PricewaterhouseCoopers appraisal report that valued the shares at $3.19-$3.61. Considering APB is dragging its heels over boosting its bid above $2.80 those prices seem well out of reach.

APB says it "will not raise" its offer but such statements have to be taken with a grain of salt during takeovers. Another comment by APB that also can be treated as a smokescreen is its lack of conditions over the sale (such as reaching a minimum level of acceptances) and its insistence it will be happy to sit on whatever stake it ends up with.

This doesn't make sense considering it already controlled the company before its bid. A partial bid would only tie up more valuable capital for minimum additional benefit. More likely the comments are designed to dissuade potential greenmailers from capturing enough shares to force APB into raising its offer.

So, does the rumour about DB brewing for the Australian market make any sense?

In the past, Heineken has been happy to import the brand to Australia from Europe, partly because it has been a cheaper option and also because the group does not own any brewing assets there. Since 1996, it has been promoting and distributing the brand through major Australia liquor group Carlton and United Breweries, part of the Foster's Brewing Group.

However, on January 1 Heineken took back control of the brand. This is despite the lager under CUB becoming the biggest seller in the $3 billion-a-year Australian premium beer sector. The move, and its timing (after being flagged last May), will only further excite the conspiracy theorists.

Could Heineken be brewed in New Zealand in much larger quantities than at present?

Almost certainly, thinks Shoeshine. DB's beer production has been shrinking for years in line with the declining New Zealand market but much of the capacity is still there. Further expansion if required could be justified on the grounds DB has already been through the tortuous process of brewing beer that meets Heineken's quality standards and making more of the same would be cheaper and easier than starting from scratch in Australia.

Then there is the issue of Heineken's profitability in Australia. By importing directly, Heineken receives all the profit from each bottle sold (after CUB's cut). If it were to brew in New Zealand, it would get only 50% of the profit because revenues would go through APB.

On the other hand, if APB were to increase its stake in DB Group from 58.4% to 100%, it is possible the profits to Heineken through APB could equal or better those from its current arrangement. This would be aided by lower transport costs between New Zealand and Australia than between Europe and Australia.

Another driving factor may be Heineken's track record in New Zealand. Since DB began brewing the product locally in the early 1990s, sales have rocketed. A contributing factor has been the beer's fresher taste, the company has claimed. Heineken must be wondering if it can make the same gains in Australia, with beer that is days old rather than weeks.

Shoeshine has found from bitter experience most rumours are not true and he stresses the DB-Australia move is pure speculation.

But he also has discovered apparent flights of fancy concurring with good business practice or simple logic often have some foundation.

Based on the assumptions above, if DB is not planning to brew Heineken for the Australian market, then it probably should be.

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