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The O'Brien Column: Fletcher Challenge, Lion Nathan head into past

Friday 14th April 2000

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The O'Brien Column Both companies reverse recent years' policies

Major announcements last week from Fletcher Challenge and brewer Lion Nathan had an ironic twist.

FCL's agreement to sell its paper division to Norwegian paper producer Norske Skog was a step in the potentially long process of dismantling a massive corporate structure put together in 1980 with the merger of Fletcher Holdings, Challenge Corporation and Tasman Pulp & Paper Co.

That exercise brought many disparate activities under one corporate roof before various parts were hived off, culminating in the current four "letter" stocks: Energy, Forests, Paper and Building.

What was extolled at the time as a group able to compete internationally on a scale that would have been impossible if the three companies had remained separate entities has been stripped down to four core activities, of which one is about to go, assuming shareholder and regulatory approvals are obtained.

It seems the other three could be disposed of within a year or so, either to overseas groups or as standalone companies.

It is ironic that the elaborate structure shaped after 1980 is now being stripped down.

Lion Nathan's "series of strategic initiatives" to capture the growth in Australia's Victorian beer market also had an ironic element.

Lion chief executive Gordon Cairns said the company identified the Victorian beer market and the premium and low alcohol segments some time ago as opportunities to develop its core beer business.

Mr Cairns' statement contained the inevitable hype that accompanies such announcements: "What we are seeing today are simply the tangible signs of a carefully conceived and executed strategy which will, over the medium term, confirm Lion Nathan's position as a significant player in the Victorian beer market."

Putting the hype to one side, the company's moves should provide interested observers with an enjoyable spectacle as Lion Nathan goes into full battle mode with Foster's Brewing on its home patch after general skirmishing for some time.

The ironic aspect of Lion Nathan's strategy was seen in the decision to provide the finance for the purchase of about 40 high-profile hotels in Victoria.

They were described as "in most cases key destination venues for the 18-30-year-old beer drinker."

In all instances Lion Nathan had negotiated on-premise agreements for distribution rights for its beers.

The total Lion Nathan investment in its Victorian strategy would be more than $A100 million, of which $A60 million would be applied to finance the purchase of on-premise distribution.

That part of the development was a bit different from the situation some years ago when the group owned a string of hotels throughout New Zealand and later had hotel interests in Australia, but there was irony in turning back, at least partially, to a key brewer's strategy of the past.

The "on-premise agreements for distribution rights for its beers" seemed a fancy modern way of referring to the concept of a tied-house, a system that dominated the liquor industry for years.

It also put Lion Nathan, even indirectly, back in the hotel business after getting out of it progressively over a long period.

The company had contracted with the Hospitality Management Company to develop and manage the operation of the hotels to which it had provided finance.

Another aspect of the strategy could have the complexions of Foster's executives turning a deep purple to accompany their company's celebrated blue and gold colour scheme, assuming they react less than phlegmatically to their competitor's strategies.

Lion Nathan Australian managing director Walter Bugno said part of the Victorian growth strategy was the previously announced arrangements with the Victorian Country Racing Council which had seen the company secure exclusive beer rights at about 50% of country race meetings.

(A "country" race meeting in Australia is one held outside the major metropolitan areas; outside greater Melbourne in Victoria's case.)

Mr Bugno said Lion had, through Racing Victoria, also secured naming rights to the Spring Carnival and the Carnival of Champions and had exclusive pourage rights at Flemington racecourse from January 1, 2001.

Some strong Australians may be weeping into their beer at the thought of a New Zealand-domiciled beer, with 45% of its capital held in Japan serving up the tipple at Melbourne's hallowed Flemington, even if the brands are of Australian origin.

The latest developments in Fletcher Challenge and Lion Nathan can be seen as the reverse of 20 years ago, when the former group was put together and adopted an aggressive growth strategy while the latter was stagnating until current chairman Douglas Myers took a sizeable stake in the company and became a director in 1982.

Fletcher Challenge is now being dismantled and Lion Nathan is expanding.

Lion Nathan earned $35 million before interest and tax from Australian operations last year, compared with $85 million from New Zealand and a $32.6 million loss in China.

Shareholders in the Fletcher Challenge stocks got some consolation last week when all four rose in price on the back of the Fletcher Paper announcement.

They will be hoping for more gains as the overall group's future is decided.

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