Cargills Group says cheers with Rs. 1.4 b buy of Three Coins Beer

In a major development in the soft liquor industry, top consumer brand Cargills (Ceylon) Plc Group has acquired famous McCallum Breweries and Three Coins Company for Rs. 1.42 billion.

The acquisition is via Cargill’s 100% owned newly formed subsidiary Millers Brewery Ltd.

In announcement after the market was closed Cargills said yesterday Millers Brewery had entered into an agreement for the sale and purchase of the business and business assets including the brands of McCallum Breweries (Ceylon) Ltd., McCallum, Brewing Company Ltd., and Three Coins Company Ltd., at a purchase consideration of Rs. 1.425 billion.

In relation to this transaction, Millers Brewery has obtained the relevant licences dated 7 February 2011 from the Excise Commissioner (Revenue) of the Excise Department of Sri Lanka.

The acquisition includes the renowned brands such as ‘3 Coins’ ‘Sando Stout’ ‘3 Coins Riva’ ‘Irish Dark and ‘Grand Blonde’.

Cargills Group’s foray into the beer industry is significant as it is the first time it will be brewing though it has had a footprint in the market. Cargills Group is one of the oldest agents for world famous Becks beer from Germany whilst it also holds the agency for Australia’s popular brand Fosters.  The move is likely to get a toast by investors when the market opens today. Cargills share price closed up 30 cents to Rs. 237.90 whilst it hit an intra-day high of Rs. 239.90.

Acquisition of Three Coins at Rs. 1.4 billion comes hot on the heels of Cargills in November expanding into dairy market by buying 74% stake in Kotmale Holdings for Rs. 922 m followed by entering into confectionary market by buying Diana Biscuits Manufacturers for Rs. 350 m

Reinforcing its foray Cargills has appointed former Nestlé Sri Lanka Managing Director Stuart Young as the Chairman of Millers Brewery Ltd. He was also recently appointed as the Chairman of Kotmale Holdings, which Cargills acquired control in a Rs. 1 billion deal.

 “This move complements the consumer shift from hard liquor to soft alcohol and would support the rapidly growing demand from the tourism sector,” Young said adding Millers Brewery would enhance industry benchmarks and develop into a lead player.

“The Company would be catering to both mass and niche clientele by developing high quality beverages with local roots but with an international outlook. The ready access Millers would have to distribution channels including linkages with institutional customers provides a strong platform from which Millers Brewery should certainly develop into a strong player in the medium term” Young said.

McCallum Brewery Limited was established in 1963 by the eminent entrepreneur Late U.K Edmund. Over the years McCallum Brewery established itself as a craft brewer nurturing  ‘Three Coins’ from a little known brand to one of premium craft stature with strong recognition among connoisseurs.

Industry sources told the Daily FT that Three Coins had been up for sale for some time and hinted that the complex and high-stakes deal must have been brewing for nearly six months.

These industry analysts estimate the beer industry to be worth Rs. 8 to 10 billion in terms of turnover but it is highly taxed as well as a revenue source for the Government as in the case of tobacco.  For example on top of being overtaxed, the alcohol industry in the six months period ended September 2010 was subject to two excise duty increases putting margins under further pressure.

However given the post war revival in economy resulting in higher disposable income as well as rebound in tourism augurs well for the beer industry. Cargills-Millers can tap for export market potential since Three Coins is popular having won several international gourmet beer awards in addition to serving the Diaspora.

The biggest competitor is Ceylon Brewery Group which began enjoying better fortunes last year.  On revenue of Rs 8.15 billion the Ceylon Brewery Group in 2009/10 generated a profit before tax of Rs. 659.48 million up from Rs. 6.24 billion and Rs. 130.88 million respectively in the previous financial year.

Lion Brewery which is a joint venture between Ceylon Brewery (50.4%) and Carlsberg Malaysia (24.5%) in 2009/10 generated a profit of Rs. 633 million on revenue of Rs 7.92 billion. This reflects an overall margin of 8.09%. At the point of gross profit, the margin was 32.76%.The level of margin returned by the beer business is a reflection of the high taxation imposed on it — both in terms of excise & revenue related levies – and the complex manufacturing process that takes basic raw materials and converts them into a liquid in a pack.

In 2009/10, Ceylon Breweries Group also excelled in exports. On a revenue of Rs 157.34 million, the Lion earned a profit of Rs. 15.59 million from its export business in 2009/10. Volumes grew by 26 % and by the end of the financial year, the company averaged 17 containers a month to overseas markets. The two focus markets of Maldives & the US performed well during the year.

Lion stimulated the market with the launch of a new stock-keeping unit (SKU); the 500 ml can to complement the existing 330 ml pack and this was an instant success. Driven by consumer convenience, cans now account for a significant share of the Group’s business. An added benefit of this SKU is that it will help reduce the dependence on glass bottles and their associated costs in the years ahead.

In the first half of 2010/11 financial year Lion’s revenue rose by 42% to Rs. 5 billion (60% of 2009/10 full year figure) and gross profit by 39% to Rs. 1.58 billion whilst profit from operations rose by 87% to Rs. 754 million, just Rs. 120 million short of the amount made in full year of 2009/10. After tax profit amounted to Rs. 413 million, up by 74% over the first half of 2009/10 financial year.

The beer industry has welcomed increased effort on the part of the authorities to curb the consumption of illicit alcohol through enforcement. However, it has often warned that enforcement is unlikely to make a significant impact on the availability of illicit liquor unless it is supported by other policy measures that address fundamentals such as pricing and availability of legitimate alcohols.