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Mixing rum and beer in a bigger monopoly: a recipe for hangover [The Fiji Times, 27 April 2005]


Serious drinkers know that if you mix spirits and beer, you are likely to have a hangover  – a real head-ache.

InFiji,Carlton  Brewery Fiji (CBF) and South Pacific Distillery (SPD) have been unofficially mixing the beer and spirit industries for years.

SPD has been controlled not just by CBF, but by the parent company of CBF which is the Australian giant, Fosters International, with its own international interests in beer and spirits.

Why a merger?

And now CBF wants to formally sign the knot with SPD (with SPD to give up her name completely).

So SPD is calling for an Extraordinary General Meeting to approve the formal merger of the two companies into a new company called Foster’s Group Pacific Limited.

If approved, SPD minority shareholders will receive 1 new CBF share for each of their current SPD shares.

According to an analysis by KPMG, SPD shareholders will benefit financially because the SPD share value is supposedly between $8.13 and $10.03, while the new CBF shares will supposedly be between $12.01 and $13.48.

Both the companies are supposed to benefit through the synergies of integrating their production, sales and marketing.

The minority shareholders of SPD are supposed to gain by diversifying their investments from spirits only, to a regional company (in Fiji and Samoa) involved in spirits, beer and soft-drinks, while becoming a formal subsidiary of a global company- Fosters.

But a number of other issues are thrown up by this proposed marriage.

Is the estimated share price of SPD a true reflection of SPD’s real long-term potential?

May there be a complete formal submerging ofFijirum’s interests into Foster’s interests regionally and internationally?

May future WTO- driven reductions in import duty protection for beer harm SPD shareholders if merged with beer?

And the real big headache, should the Commerce Commission be approving the full, formal and legal creation of a bigger monopoly inFiji’s alcohol industry?

De facto monopoly already

  Years ago, a previous Government showed a total lack of commitment to competition by allowing Carlton Brewery Fiji (the dominant brewery inFiji) to buy controlling shares in South Pacific Distillery – the only manufacturer of spirits inFiji.

Effectively managing both the beer and the spirits monopolies, CBF and SPD have been able to make magnificent profits, largely through high import duty protection against cheaper imports.

Unfortunately, it has not been clear that CBF (and SPD) have maximised the great international export potential of Bounty Rum (see my previous article “No bounty from our rum”, The Fiji Times, 10 June 2003).

Indeed, while SPD’s rum distilled in pot stills has been winning gold medals internationally, CBF has not aggressively developed this product for the international export market.  Possibly they do not wish to throw their scarce resources at the current small scale product, and possibly also because of Foster’s more valuable competing interests regionally.

Neither has CBF maximised the potential ofFijibeer in the Pacific region, where CBF is unfortunately also the agent for Fosters products.  And probably, the parent company Fosters makes more money in the region from its own products, than it does from exports ofFijibeer and rum.

Minority shareholders sleeping?

  Clearly, there are very real conflicts of interest between the minority shareholders of CBF and SPD and the Australian giant Fosters.

The minority shareholders in CBF and SPD do not seem to have queried CBF’s  lack of enthusiasm in pushing theFijiproducts regionally and internationally.

The minority shareholders have probably been in their “comfort zones”: why rock the boat when the profits are rolling in and the share prices are rising?

Except that the protection may not last forever.

The effects of PICTA and WTO?

  SPD shareholders could consider that there are several interesting developments likely over the next ten years.  Firstly, there may be the inclusion of alcohol products into the regional trade agreement (PICTA) signed by all thePacificIsland countries.

Should this occur, then CBF and SPD (separately or merged) may stand to gain substantially in the regional markets, with import tariffs applied against competing imports from outside the region (including Fosters products fromAustralia).

But, if other regional trade agreement with Australia and NZ (such as PACER) comes into play, then reduced duties on Australian products may well lead Fosters to decide to simply supply the whole regional market using their international Fosters brands, rather than with Fiji or Samoan products.

Of course, WTO may also induce a reduction of import duties on competing beer and spirits products from everywhere in the world (especiallyPhilippinesandMexico), and not justAustraliaand NZ.

What would Fosters attitude then be towards very small, and relatively inefficient manufacturers of beer and rum inFiji?

There is also the question of share price valuation.


What value for SPD shares?


  The explanatory memorandum sent by SPD quotes KPMG that the exchange of CBF shares for SPD shares will be “fair and reasonable” for SPD shareholders who may even gain financially.


But there are real valuation problems.  For a start, there has been negligible trading of SPD shares (many buyers, no sellers) hence the stock market prices are not indicative at all.


Secondly, KPMG relies for its valuation on “capitalisation of maintainable earnings”.


But both CBF and SPD maintain that after the merger, it will be “business as usual”.  KPMG suggests that any future improvement in earnings will be obtained through “overcoming the production problems experienced in 2004 and growth in export bulk sales”.


Nowhere in the KPMG report is there any consideration of the possibility that SPD (and CBF) have probably not been exploring the maximum export value of its quality Bounty rum product which has been winning gold medals internationally.  Hence even SPD’s  current profitability (and share value) may be seriously understated in terms of its full potential under a more aggressive owner.


Interestingly, SPD’s Explanatory Memorandum acknowledges briefly (in Section 5.2 on “Disadvantages and Risks”) “If, following the integration, the spirits sector outperforms the other parts of the multi-beverage business, the benefits shareholders may otherwise have received had the spirits business remained a stand-alone business may be diluted”.  i.e. if Bounty Rum were to do well internationally, SPD shareholders may be better off if SPD did not merge with CBF.


There is no further reference to this negative qualification: the rest of the Explanatory Memorandum is devoted to convincing minority SPD shareholders to go along with the formal merger.


Possible benefits of merger


  Of course, there may be other additional benefits for SPD shareholders after the merger, apart from the apparent immediate increase in share value.


First, the value of CBF shares are unlikely to fall to the extent that the value of SPD shares may fall if Fosters decides, for its own commercial reasons, to place minimal value on the protection of SPD’s profitability. After all, the formal merger of the two companies is quite unlikely to change in any significant way, Foster’s management of its relative interests in CBF and SPD.


Second, there is the possibility (albeit small) that Fosters will go all out to genuinely develop Fosters Group Pacific Limited products not just for the regional market, but globally – just as Fiji Water has remarkably done.  Hope and pray.


What of the Commerce Commission ?


  The formal merger of CBF and SPD requires the permission of the Commerce Commission.


The Commerce Commission probably has a headache from its struggle to reduce  telecommunication charges (and a worse  headache just thinking about the real problem of bringing in competition).


While the proposed merger of CBF and SPD may not in any real way change the current reality of Foster’s total control,  it would formalise the virtual monopoly ofFiji’s alcohol market by one company.


The charter of the Commerce Commission no doubt requires it to oppose this merger.   This it can easily do by simply saying “NO” (please don’t waste time and money by calling for public submissions).


Need to break it up


  But the Commerce Commission is also required to encourage competition.  It could therefore rule that instead of formally merging with SPD, CBF must sell its interests in SPD, at a fair price (as for instance estimated by KPMG).


This procedure of breaking up monopolies and cross-ownership is standard practice internationally (and will inevitably have to be faced in our telecommunications industry).


And don’t forget, there may well be potential buyers out there prepared to aggressively develop and market SPD’s world-beating rum products of the pot still variety.


Indeed a company such as Fiji Water might find many synergies in producing and marketing a top qualityFijirum product internationally, alongside its water product.


Good rum can go well together with good water. Mixing rum with beer is a recipe for an economic headache.


Separating the beer and spirits industries after they have been mixed is an even bigger head-ache for the Commerce Commission.



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