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Can Labatt Shed Its Belly But Keep The Beer?


The Corporation

CAN LABATT SHED ITS BELLY BUT KEEP THE BEER?

George S. Taylor, the chief executive officer of John Labatt Ltd., isn't much different from other corporate chiefs who want bigger profits. It's the way he's going about achieving that goal that sets him apart. Instead of expanding, Taylor is selling off businesses. And rather than finding new avenues for growth, he wants the Toronto-based brewer to go back to its roots in the beer business--even though Canadian beer consumption has been falling for five straight years.

That may sound like an ill-advised--if not downright risky--strategy, but Taylor, 52, says slimming down is the best way to "bring value to shareholders." And pleasing shareholders isn't just a management platitude at Labatt these days. Roughly 38% of Labatt's stock is owned by Canada's powerful Bronfman family through its holding company, Brascan Ltd. Many analysts believe the family patriarchs, Peter and Edward, want bigger returns from Labatt to help bail them out of their financial woes. The Bronfman empire, with interests ranging from mining to banking, is under mounting strain because of some poor investments, notably in real estate.

SPRUCING UP. The Bronfmans have already profited from Labatt's downsizing. Brascan received $80 million in October as part of a special shareholder dividend after Labatt sold off many of its food businesses. And future asset sales will further enrich the family's coffers. Analysts in the U.S. and Canada are even speculating that Labatt's slenderizing is part of a broader plan to make Labatt more appealing and eventually allow the Bronfmans to sell their shares. "They need the money, and Labatt is a very good asset," says analyst Jacques Kavafian of Levesque Beaubien Geoffrion Inc., a Montreal securities firm.

Like the Bronfmans, Labatt's fortunes have changed since the 1980s, when former CEO Peter N. Widdrington transformed Labatt into a consumer-product giant. He gobbled up some three-dozen companies, primarily food and dairy businesses. At one point, Labatt sold everything from yogurt to pizza, in addition to beer. In 1984, he launched The Sports Network (TSN), now the biggest cable sports channel in Canada. The aim was to expand Labatt's entertainment division, which then consisted of a 45% stake in the Toronto Blue Jays. Labatt now owns 90% of the world champions.

Unfortunately, Labatt's food and dairy acquisitions weren't world class. Many had scanty market shares, and Labatt didn't have the capital to make them grow. The drawbacks to expansion soon became clear. From 1986 to 1989, annual sales soared 50%, to a record $4.3 billion. But profits grew more slowly, and return on equity tumbled (chart).

In response, Labatt's management decided in 1989 to focus on fewer businesses. In addition to selling off its food companies, Labatt is preparing to spin off to shareholders next year its U.S. and Canadian dairy business, which accounts for half the company's revenues. Labatt is even thinking of selling off up to 49% of its entertainment division.

To help compensate for lost revenues, Taylor, who was Labatt's No.2 executive before being promoted to CEO last September, is pushing to make Labatt's brewing operation far more efficient and profitable. He vows to cut production costs by 20% within two years, largely by closing as many as 3 of Labatt's 11 breweries. Taylor also expects continued market gains from Latrobe Brewing Co., which Labatt purchased in 1987. Volume sales of the U.S. brewer's Rolling Rock brand rose 15% last year.

BUSCH BID? Labatt's strategic about-face will help in the near term. Michael Palmer, president of Toronto-based Equity Research Associates, which tracks stocks for institutional investors, projects that Labatt's operating profits will climb 20%, to $284 million, in the current fiscal year, before the dairy business is spun off. He expects revenues to rise by only 2%, to $3.1 billion. Longer-term is another matter. Not only is the Canadian beer market contracting because of stiff taxes and high retail prices, but analysts believe that U.S. brewers, notably Stroh Brewery Co. and G. Heilemann Brewing Co., may win a bigger market share.

In the face of such sour possibilities, some Labatt-watchers are betting the Bronfmans will sell out before too long. The market value of their shares is roughly $800 million. Analysts believe one possible buyer might be Anheuser-Busch Cos., which markets its beer in Canada through Labatt.

Still, a deal doesn't look imminent. Taylor insists that there are no plans to sell Labatt. Brascan Chairman J. Trevor Eyton denies that the Bronfmans want out. And Peter M. Flannigan, an investment banker at Dillon Read & Co. and member of Busch's board, says: "I have seen no offering document." But unless Labatt's CEO can squeeze even more profits from Canada's shrinking beer market, the market's debate over Labatt's future--and questions about Taylor's strategy--are bound to continue.William C. Symonds in Toronto, with Julia Flynn in Chicago


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