SAB purchase of Czech breweries casts doubt on Carlsberg presence
In one report, Deutsche Bank said SAB is now Central Europe's most powerful beer producer, upgrading its recommendation for Okocim on the basis that Carlsberg will look to dump its 44% holding. This is because any hope Okocim might have for a national resurgence could now be untenable with the brewery squeezed between Heineken-owned Zywiec and SAB-backed Kompania Piwowarska.
"We change our recommendation for Okocim from 'market perform' to 'buy' on the assumption that Carlsberg will be obliged to recognize their weakness and sell the company, probably to SAB," Deutsche said in an Oct. 7 report.
A sale would possibly bring some relief to shareholders, who have seen the stock decline 27% year to date, while the Warsaw Stock Exchange's WIG Index is up 9.4% during the same period.
Okocim has been down in the dumps for the past two years, watching its market share drop from 9.7% in 1997 to an expected level of about 7.5% by the third quarter of this year, said Rafal Wiatr, an analyst at Citibank (Poland). The ailing brewer saw sales in the first half of 1999 fall to zl. 176.9 million ($45.36 million) from zl. 202.1 million ($57.74 million) in the same period last year.
While Okocim has stumbled, competitors have raced ahead to consolidate their positions on the market.
SAB, which owns 48% and 45% stakes in the Lech and Tychy breweries respectively through Kompania Piwowarska, has seen the most growth, Wiatr said. SAB appears to have grown its market share to about 22% by the end of the third quarter, up from 19.3% in mid-1998. The industry's biggest player, Zywiec, continues to hover around the 38.5% mark, Wiatr said. Dutch giant Heineken owns a 50% stake plus one vote in the Zywiec group, which comprises the Zywiec, Elbrewery, Lezajsk and Warka breweries.
Deutsche said that SAB's growth is not going to come to a standstill. "SAB will clearly seek to increase its market share toward 30%," it said. "The Polish market will likely be dominated by a duple of SAB and Heineken, between them owning 70% of the market."
But Denmark's Carlsberg quickly moved to counter the speculation that it was ready to throw in the beer towel.
"We do not intend to sell Okocim, Carlsberg is committed to (it)," said Henrik Moelstroen, the Carlsberg Group's public relations director. "We have had no enquiries from anybody. I have never experienced a market where so many rumors are floating around."
Deutsche's report took the view that this position could change because the brewer has not yet opted on a final course of action for Poland. "We do not believe that Carlsberg has yet made the decision to sell Okocim and until it does the price will continue to stagnate," the report said.
Other analysts were bemused at Carlsberg's performance during its time with Okocim. "Carlsberg has been with Okocim for three years and hasn't done anything," Wiatr said. "They can sell it now or do something (else) in the region, which is quite difficult, but there's no point in doing it."
Analysts have consistently argued in the past that if Okocim's fortunes are to take an upturn, it needs to tighten up its distribution network. Whereas Kompania Piwowarska and Zywiec control their own networks, Okocim does not, and instead relies on third-party distributors who hike prices to make a profit when they sell the beer to retailers, pushing down the brewer's margins. Okocim has said it is building a new plant in Krakow to solve some of its production problems, but given the current state of play, even that is unlikely to come to fruition, Wiatr said. "They don't have (the) distribution and they talk about increasing their capacity," he said.
Concerning a potential takeover, the mood in the SAB camp was ambiguous.
"I can't confirm or deny" plans to acquire Okocim, said Gert Nel, financial director at Kompania Piwowarska. "If Okocim were up for sale, certainly we would look at it with interest, but those decisions would be made on the ground" at SAB International in London. SAB International's group corporate finance and development director, Malcolm Wynan, declined to comment. However, Nel said that SAB was talking with breweries in Poland.
"SAB are in a good position to do it, they're looking very aggressive and they'd be allowed to do it," Wiatr said, referring to current anti-monopoly regulations, which prevent breweries from taking control of more than 40% of the market. The company has actively pursued promotional campaigns this year, including a well-publicized Lech television advertisement featuring Polish soccer veteran Zbigniew Boniek, and the publicity funding doesn't look set to dry up any time soon.
"With a 95% share in their home market (South Africa), they're sitting on a lot of cash in a country that's hot," said Bill Carey, CEO of alcohol distributor the Central European Distribution Corp. (CEDC). "They're spending their cash." Furthermore, the firm recently raised £200 million and said that it intended to spend £150 million of that on investments in Poland.
While Okocim is the brewery most under threat from SAB's recent acquisitions and increasing regional presence, the move also has implications for Zywiec, while it struggles with its EB brand's disastrous 1999 performance. "The price of Zywiec has fallen in anticipation of an increase in the competitive threat, and it is true that there will be great pressure on margins," Deutsche said.
But Deutsche was optimistic that Zywiec, as market leader and with competitive strength in its distribution network, is strong enough to resist any threat posed by SAB. "(We) are consequently retaining our price target and market perform recommendation," Deutsche said. Furthermore, it has a lot of costs to cut from its current operations, the bank added.
For the time being, "the only thing (Zywiec) can do is to concentrate on their business, they have a lot of work to do," Wiatr said. "There are weak sales coming from EB and significant debt on their books, with interest to be paid on this every month."
Ninety percent of that debt, estimated to be zl. 760 million ($194 million) by the end of the year, was inherited through the merger of Zywiec and Elbrewery, which produces the EB brand, at the end of 1998. While EB borrowed the money from Polish and international banks, including ABN Amro, to spend on distribution and production facilities, some of that debt will have to be paid off this year. In contrast, Okocim has no debt, Wiatr said.
And although Okocim might think it's got it bad, EB's sales fell 17.5% in the first six months of the year compared to the same period in 1998, Wiatr said. Simultaneously, its market share has fallen from 17% to below 14%, he said.
After a period of spectacular growth in the space of a few years, the company hit the 18% mark and from then on it's been downhill ever since due to continual management changes, a lack of focus on brand building and no loyalty base, Carey said. "In any field or market, if you go too fast, you always risk a downward spiral as well," he said.
While the reason for the merger was probably to prevent new players from entering the market, it now looks like it wasn't such a smart move. "(EB's previous) shareholders got out at a very good time," Carey said. Wiatr added that EB now looks like a dying brand and that Heineken will have to act fast to reinvent it.
"We change our recommendation for Okocim from 'market perform' to 'buy' on the assumption that Carlsberg will be obliged to recognize their weakness and sell the company, probably to SAB," Deutsche said in an Oct. 7 report.
A sale would possibly bring some relief to shareholders, who have seen the stock decline 27% year to date, while the Warsaw Stock Exchange's WIG Index is up 9.4% during the same period.
Okocim has been down in the dumps for the past two years, watching its market share drop from 9.7% in 1997 to an expected level of about 7.5% by the third quarter of this year, said Rafal Wiatr, an analyst at Citibank (Poland). The ailing brewer saw sales in the first half of 1999 fall to zl. 176.9 million ($45.36 million) from zl. 202.1 million ($57.74 million) in the same period last year.
While Okocim has stumbled, competitors have raced ahead to consolidate their positions on the market.
SAB, which owns 48% and 45% stakes in the Lech and Tychy breweries respectively through Kompania Piwowarska, has seen the most growth, Wiatr said. SAB appears to have grown its market share to about 22% by the end of the third quarter, up from 19.3% in mid-1998. The industry's biggest player, Zywiec, continues to hover around the 38.5% mark, Wiatr said. Dutch giant Heineken owns a 50% stake plus one vote in the Zywiec group, which comprises the Zywiec, Elbrewery, Lezajsk and Warka breweries.
Deutsche said that SAB's growth is not going to come to a standstill. "SAB will clearly seek to increase its market share toward 30%," it said. "The Polish market will likely be dominated by a duple of SAB and Heineken, between them owning 70% of the market."
But Denmark's Carlsberg quickly moved to counter the speculation that it was ready to throw in the beer towel.
"We do not intend to sell Okocim, Carlsberg is committed to (it)," said Henrik Moelstroen, the Carlsberg Group's public relations director. "We have had no enquiries from anybody. I have never experienced a market where so many rumors are floating around."
Deutsche's report took the view that this position could change because the brewer has not yet opted on a final course of action for Poland. "We do not believe that Carlsberg has yet made the decision to sell Okocim and until it does the price will continue to stagnate," the report said.
Other analysts were bemused at Carlsberg's performance during its time with Okocim. "Carlsberg has been with Okocim for three years and hasn't done anything," Wiatr said. "They can sell it now or do something (else) in the region, which is quite difficult, but there's no point in doing it."
Analysts have consistently argued in the past that if Okocim's fortunes are to take an upturn, it needs to tighten up its distribution network. Whereas Kompania Piwowarska and Zywiec control their own networks, Okocim does not, and instead relies on third-party distributors who hike prices to make a profit when they sell the beer to retailers, pushing down the brewer's margins. Okocim has said it is building a new plant in Krakow to solve some of its production problems, but given the current state of play, even that is unlikely to come to fruition, Wiatr said. "They don't have (the) distribution and they talk about increasing their capacity," he said.
Concerning a potential takeover, the mood in the SAB camp was ambiguous.
"I can't confirm or deny" plans to acquire Okocim, said Gert Nel, financial director at Kompania Piwowarska. "If Okocim were up for sale, certainly we would look at it with interest, but those decisions would be made on the ground" at SAB International in London. SAB International's group corporate finance and development director, Malcolm Wynan, declined to comment. However, Nel said that SAB was talking with breweries in Poland.
"SAB are in a good position to do it, they're looking very aggressive and they'd be allowed to do it," Wiatr said, referring to current anti-monopoly regulations, which prevent breweries from taking control of more than 40% of the market. The company has actively pursued promotional campaigns this year, including a well-publicized Lech television advertisement featuring Polish soccer veteran Zbigniew Boniek, and the publicity funding doesn't look set to dry up any time soon.
"With a 95% share in their home market (South Africa), they're sitting on a lot of cash in a country that's hot," said Bill Carey, CEO of alcohol distributor the Central European Distribution Corp. (CEDC). "They're spending their cash." Furthermore, the firm recently raised £200 million and said that it intended to spend £150 million of that on investments in Poland.
While Okocim is the brewery most under threat from SAB's recent acquisitions and increasing regional presence, the move also has implications for Zywiec, while it struggles with its EB brand's disastrous 1999 performance. "The price of Zywiec has fallen in anticipation of an increase in the competitive threat, and it is true that there will be great pressure on margins," Deutsche said.
But Deutsche was optimistic that Zywiec, as market leader and with competitive strength in its distribution network, is strong enough to resist any threat posed by SAB. "(We) are consequently retaining our price target and market perform recommendation," Deutsche said. Furthermore, it has a lot of costs to cut from its current operations, the bank added.
For the time being, "the only thing (Zywiec) can do is to concentrate on their business, they have a lot of work to do," Wiatr said. "There are weak sales coming from EB and significant debt on their books, with interest to be paid on this every month."
Ninety percent of that debt, estimated to be zl. 760 million ($194 million) by the end of the year, was inherited through the merger of Zywiec and Elbrewery, which produces the EB brand, at the end of 1998. While EB borrowed the money from Polish and international banks, including ABN Amro, to spend on distribution and production facilities, some of that debt will have to be paid off this year. In contrast, Okocim has no debt, Wiatr said.
And although Okocim might think it's got it bad, EB's sales fell 17.5% in the first six months of the year compared to the same period in 1998, Wiatr said. Simultaneously, its market share has fallen from 17% to below 14%, he said.
After a period of spectacular growth in the space of a few years, the company hit the 18% mark and from then on it's been downhill ever since due to continual management changes, a lack of focus on brand building and no loyalty base, Carey said. "In any field or market, if you go too fast, you always risk a downward spiral as well," he said.
While the reason for the merger was probably to prevent new players from entering the market, it now looks like it wasn't such a smart move. "(EB's previous) shareholders got out at a very good time," Carey said. Wiatr added that EB now looks like a dying brand and that Heineken will have to act fast to reinvent it.
