Asahi swallowing a bitter draught

The thirst of Japanese companies for Australian food and beverage businesses appears to be unquenchable, with Japan's Kirin taking a 9.9 per cent stake in the much sought after Warrnambool Cheese and Butter Factory.

While Kirin's purchase is motivated to protect its existing marketing and manufacture of cheddar cheese, rather than launch a bid, it will pressure other suitors to pay more.

It comes two years after Japanese brewer Asahi Holdings spent a nose bleeding $NZ1.5 billion ($1.3 billion) for Independent Liquor, which has ditched the brand name in Australia, overhauled the company structure and made a hefty provision in its Australian accounts, according to a recent filing with ASIC.

The massive $464 million write-down and loss of $494 million comes amid a legal battle that has erupted between Asahi and Independent Liquor's two previous owners, private equity firms Pacific Equity Partners (PEP) and Unitas Capital.

Asahi alleges "misleading or deceptive conduct" that resulted in the brewer grossly overpaying for Independent Liquor.

Asahi bought Independent Liquor on August 8, 2011. At the time many in the industry believed it had paid too much for a business that had been the victim of an alcopop tax in the ready-to-drink (RTD) market in Australia. Independent is one of the biggest suppliers of RTDs in Australia and New Zealand, selling products such as Vodka Cruiser, Cody's Bourbon and Woodstock Bourbon.

The legal action, write-downs and change in the business model puts the spotlight squarely on private equity at a time when a number of companies are set to roll off the private equity production line after being fattened up for a market day listing, including Veda and electronics retail chain Dick Smith.

Whatever the case, it reinforces the perception of buyer beware, given investors got burnt by a number of high-profile private equity IPOs including Pacific Brands, Myer and Collins Food, which was floated by PEP at $2.50 and soon after lost a quarter of its value in one day when it downgraded its prospectus forecasts from $10.3 million to $8 million. It last traded at $1.63.

While there have been some successful private equity asset floats and trade sales, it is the failures that burnt most bright in the minds of investors.

From Asahi's point of view, it feels it has been dudded and wants compensation. Given it has written off $464 million of goodwill on its Australian and New Zealand alcohol assets at December 2012, it is not hard to see why.

At the heart of the allegations is that the forecast earnings figures for Independent Liquor were "inflated" due to the wrongful inclusion of income and exclusion of expenditure to the tune of $NZ42 million for September 2011, and earnings figure trends were "not one of growth but decline, at least from 2010 to 2011".

Earlier this month the boss of Independent Liquor's Australian subsidiary Independent Distillers wrote to customers telling them it had changed its name in Australia to Asahi Premium Beverages and restructured its sales and marketing to take advantage of Asahi's soft drink business Schweppes.

The aim of the new model is to grow the business and focus on costs. It is an interesting combination given both businesses have previously operated on two different trading terms to market.

"We are bringing together the Schweppes Australia licensed sales team with the Independent Distillers team under the banner of Asahi Premium Beverages, to provide you with a single team committed to delivering outstanding customer service to the licensed market," the letter said.

The new name and restructure is significant given the current legal action and losses. It suggests Asahi is moving away from the weaker consumer brand trademarks and ready-to-drink products that Independent Distillers was renowned for and becoming more premium as it tries to marry two businesses, one with tight trading terms, and the other, Schweppes with decent trading terms.

Asahi's latest accounts for the Australian and New Zealand businesses reveal a massive $494 million loss for the year to December 2012, largely due to a $464 million impairment charge booked against the goodwill of its Australian and New Zealand alcoholic businesses. If the impairment loss is stripped out, it lost $30 million, compared with a $50 million loss in 2011.

The group slashed the value of goodwill on its Australian alcohol business to $239 million from a value of $595 million in 2011.

It wrote almost $100 million off the value of goodwill ascribed to its alcohol business in New Zealand to $154 million in 2012.

In New Zealand its business has been the subject of speculation that it "channel stuffs", a practice where a supplier forward sells stock on extended terms to retailers in order to account for significant "one-off" sales in a particular period.

For obvious reasons it isn't very popular with industry suppliers or retailers as it can result in big stock overhang and holding costs for retailers, who then must either write off the stock or heavily discount it in order to clear it out.