Japanese brewer shaken to bursting over purchase

WHEN Japanese brewer Asahi Holdings took legal action against two private equity players, alleging they behaved in "misleading or deceptive conduct" that resulted in the brewer overpaying for Independent Liquor, it opened up a can of worms.

WHEN Japanese brewer Asahi Holdings took legal action against two private equity players, alleging they behaved in "misleading or deceptive conduct" that resulted in the brewer overpaying for Independent Liquor, it opened up a can of worms.

Allegations include channel stuffing and a failure to properly record expenses by reversing audit fees, sick leave payments, bonus payments and excise payments, all "with no reasonable basis to do so and therefore failing to record an expense in EBITDA [earnings before interest, tax, depreciation and amortisation] up to and concluding the completion date".

The 47-page statement of claim, also alleges that trade discounts and volume rebates - discounts given to retailers who purchase large amounts of products - were excluded from EBITDA.

At the heart of the allegations is that the forecast earnings figures 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".

The upshot is Asahi believes it grossly overpaid for Independent Liquor and wants compensation. Industry estimates are that it could be as much as $NZ500 million.

It quotes emails from a senior executive at Independent to the auditor saying: "This is one where LTM [last 12 months] would be helpful closer to $111 million, I believe." The auditor responded that he would "address the comments". In an email on July 29, 2011, then chief executive Peter Murphy wrote to certain directors referring to "the purchaser" not having seen the "EBITDA figures sent to the bank". Murphy says: "The first board meeting should be a fun discussion."

Asahi bought Independent Liquor on August 8, 2011, for a head-spinning $NZ1.5 billion. At the time many in the industry believed it had paid too much for a business that had been the victim of government regulation including tax rises in the ready-to-drink (RTD) market. 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.

Months after Asahi bought the business, this column revealed that Asahi was upset and asking questions about the deal. "The industry speculation is that Asahi is considering some form of monetary compensation from the former owners of ILG, Pacific Equity Partners and Unitas. . . . Whether Asahi has a leg to stand on, given it did due diligence before it made the offer, or whether the parties will work out a deal is yet to be determined, but nobody is talking on the record," the column reported.

Talks at that time came to naught and the fight will be played out in the courts, here and in New Zealand. PEP and Unitas are yet to file a defence but say they will vigorously defend the allegations and institute their own legal proceedings. "The approach taken by Asahi is a breach of the sale contract. The sellers intend instituting legal proceedings and seeking damages in the New Zealand courts," PEP and Unitas said in a statement.

Against a backdrop of trying to claw back some money from PEP and Unitas, the new owners of Independent have been wrestling with falling volume and value shares in Australia and New Zealand. Indeed, the latest ACNielsen figures show that since Asahi bought Independent in August 2011 its rolling moving average total (MAT) on a volume and value basis has fallen. In Australia, on a value basis it has shrunk from 7.9 per cent to 6.3 per cent and volume has fallen from 12.2 per cent to 9.8 per cent. In New Zealand, volume fell from 32.7 million litres in 2011 to 30.6 million litres in 2012. Much of the fall in volume appears to have been captured by competitor the Drinks Factory.

In the past few years Asahi has been busy buying businesses in Australia and New Zealand, including Schweppes in 2009 and P&N, Independent Liquor, Charlies and Mountain H2o in 2011.

Acquisitions were off its radar in 2012 but speculation is rife that it is now looking at buying the Mill Liquorsave in New Zealand, which would take it into the discount retail liquor market, and in the process put a few noses out of joint.

Put simply, it would put Independent in competition with other retailers, including national liquor banner groups, as well as pitch it against Woolworths, which owns Progressive in the discount liquor market. If it annoyed enough retailers, it could face the prospect of being dropped from their distribution lists, which, in the circumstances, is a headache the company doesn't need.

It is already the subject of speculation that it continues to "channel stuff" in New Zealand, which is 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.

An industry source said channel stuffing could become a "vicious cycle" as the supplier becomes addicted to the practice in order to meet the previous year's sales levels.

Like any addiction it is hard to break and the perception in New Zealand is that Independent is yet to go cold turkey. The industry talk is that Independent Liquor was pushing deals into the New Zealand market towards the end of last year, including extended credit and bulk pallet deals.

Asahi and Independent were not available for comment.

Interestingly, Asahi alleges in its statement of claim that the practice of channel stuffing and other accounting irregularities meant the true earnings of Independent were overstated by more than $NZ40 million. It says Independent "provided incentives to customers to bring forward purchases of products that would otherwise have occurred in later accounting periods, in the ordinary course, and failed to exclude that revenue from EBITDA up to and including on the completion date."

PEP and Unitas bought Independent for $NZ1.2 billion in 2006, outbidding trade buyers such as Brown-Forman, Lion Nathan, Diageo and Asahi. Two years later in April 2008 that price looked even more expensive when the federal government decided to reverse the Howard government's tax concession on ready-to-drink beverages (more commonly known as the "alcopops tax") and tax the alcohol in RTD drinks at the same rate as full-strength spirits.

Independent Liquor dodged a similar budget in New Zealand, with a recent decision by the government to back down on an even tougher alcopops tax. It will undoubtedly be hoping for some more luck.

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