Adventurous Australia Inc going global

Adventurous Australia Inc going global

* VISION 2010
Robert Gottliebsen
* April 14, 2007

ABC Learning believes that its Australian model can be duplicated in 10 states in the US and so is buying American childcare centres

The most obvious and promising offshore strategy is

to buy similar overseas businesses and adapt them

THE long-term performance of the Australian stock market will largely depend on a set of remarkable business strategies that our boards are embracing.
The 35 leading companies so far studied in the Vision 2010 series show that most chief executives are being more adventurous than at any time since Federation. And what is happening in Australia duplicates a global trend.

An IBM study of world business strategies shows that while chief executives will still rely on new products, research and good management, including cost control, to achieve growth, an increasing number believe that they must go further. It will be their business models that will produce the biggest growth and give them an advantage over their competitors.

In Australia, the most common feature of the new business plans is an extension or expansion overseas. But the techniques that are being used to expand offshore vary greatly and there are some significant new local business strategies.

In all, more than three-quarters of the Vision 2010 companies have strategies that involve substantial expansion offshore. Only a decade ago some of the pioneers of Australian overseas expansion such as AMP, Brambles and Foster's were doing it tough. The overseas failure rate was so high that some institutions were pressing chief executives to stay at home. But a series of remarkably successful global expansions has changed attitudes.

In the Vision 2010 series CSL, Computershare, Orica, Resmed, Cochlear and resource companies such as Woodside and (at the smaller end) Oxiana have been inspirational examples. Brambles has undertaken a remarkable transformation. And companies like James Hardie, Westfield and BHP add to the global role models.

The most obvious offshore strategy for a company to adopt is to take its Australian business and expand it overseas by buying similar overseas businesses and adapting them.

For example, ABC Learning believes that its Australian model can be duplicated in 10 states in the US and so is buying American childcare centres.

If ABC is successful, almost certainly chief executive Eddy Groves will take the concept into the rest of America and to other parts of the world to become the "McDonald's" of global child care. It's a remarkably ambitious goal.

No less ambitious is the BlueScope strategy of rapidly setting up a set of steel-coating plants around Asia which are only now beginning to turn profits. It is Australia's largest industrial investment in Asia.

OneSteel is attempting to buy Smorgon partly because of the opportunity it gives the company to become a global player in steel scrap, which will become more important as a raw material as carbon emissions restrictions are tightened.

Ramsay expects to have around a third of its revenue in overseas hospitals -- probably in the UK, where experienced private operators are being given contracts to run public hospitals.

Most resource companies think globally. Zinifex has always had a European operation but is now stepping up the global pace with a Canadian acquisition.

Like resource companies, insurance companies like IAG must keep expanding to avoid being taken over. IAG has set its sights on Asia. But these ambitious "conventional" global business strategies take on a very different twist when they are attached to the Australian superannuation industry.

There is no doubt that Axa has one of the best Asian franchises of any Australian company and not only will Asia dwarf the Australian operation, but longer term the Axa stake in China may dominate its Asian operation.

The Axa long-term potential is a warning to all companies that can be transformed by overseas expansion -- they may receive a takeover bid just as they are about to gain a success spurt. In the case of Axa the French parent tried to grab the Australian minorities at a very low price when the most recent successes were not apparent to the market.

Funds manager Perpetual and property companies such as Mirvac, Centro and GPT have achieved much of their success by mobilising superannuation capital in Australia. Perpetual believes that the weight of superannuation capital headed for the share market in the longer term will push prices too high unless there is substantial rebalancing towards overseas shares.

The Australian property market will also simply not have the assets to absorb the amount of superannuation money coming forward that is looking for good property investment. Accordingly, Australian property managers have developed business strategies to expand offshore. Centro has become a major consolidator of US supermarket-based shopping centres.

Mirvac invested in property securities in the US and once it established an American beachhead it began attracting US investors. In the case of Mirvac the US operation is likely to dwarf the Australian business in the long term, boosted by the popularity of Mirvac securities to US institutions.

The company is also packaging Australian undeveloped land for local funds looking for high-return property.

GPT spurned a bid from Lend Lease to link with Babcock & Brown in a major investment in Europe. This business plan will become increasingly important in GPT's future growth because the company is selling off many of its prime shopping centres to institutions because they do not provide the higher returns the same institutions are demanding of the listed trust.

The GPT strategies underline one of the major driving forces behind the new business plans -- the pressure of superannuation fund managers that listed Australian companies grow at around 15 per cent a year. Many companies fear that unless they have a strong growth outlook as well as short-term performance they will be sold out by the institutions.

The long-term pressure is good, although as we see with listed property trusts it can lead to a higher risk profile. Short-term pressure can lead to wrong long-term decisions.

Some business plans are often motivated by growth forces created by the industry. For example, Toll has set up an Asian transport network partly because it was following its customers. It needed a stevedoring company that it could mould into its network and when that couldn't be achieved via alliances the company acquired Patrick in a hotly contested deal.

Foster's is a major player in all major world premium wine markets following the acquisition of Southcorp. But what is attracting the world's attention is its attempt to bring together wine and beer marketing.

Many in the liquor industry say the combination is not possible and the latest interim report showed that Foster's was not finding the task easy. But the world is fascinated by the attempt and it is likely that in the coming years (assuming it is not acquired and broken up) Foster's global expansion will come via a series of alliances with global liquor companies which will see brand swapping and a possible franchising of Foster's distribution techniques.

Foster's is a good example where the stock market simply has no concept of the long-term potential power of the global position that the company has achieved -- all that matters to the Foster's analysts are the short-term earnings.

Qantas is in exactly the same position. In the Vision 2010 series, chief executive Geoff Dixon explained that the company would make its kangaroo airline much more efficient while increasing the size of Jetstar five and sixfold.

The freight business would be expanded with takeovers and might be moulded into a company that could take on Toll. Similarly the engineering business could be greatly expanded.

While the brighter analysts understand what is happening, the institutional hacks who dominated the register had no concept of the value of these plans -- which is why the company seems likely to be taken over in the private equity deal. The private equity investors understand the potential and stand to reap a fortune, unless there is a major dip in global airline traffic.

Among the banks, CBA is making a minor expansion in China, and ANZ is putting together a network of Asian investments. But by far the most aggressive in international strategy comes from National Australia Bank.

Whereas most companies develop their plans in Australia and take the businesses offshore, in the UK NAB is developing a chain of branch operations aiming at rich people and medium-size business markets. These branches are virtual franchises, giving great autonomy to the people in charge. If it works in the UK, the concept will be brought back to Australia and taken to other countries.

Of course, not all the business plans being embraced by Australian chief executives involve offshore expansion. Westpac, like AMP, is staying home because they can see future growth in the base market. Lion Nathan and Caltex have a similar strategy.

Some local strategies are as exciting as the international moves. Commonwealth Bank is converting its branches into virtual franchise operations -- a dramatic change from its past centralised approach.

Bank of Queensland goes one step further and provides a real franchise that can be sold, enabling it to expand rapidly. In attempting to acquire Bendigo Bank it is aiming at a company that decentralised retailing via community banks -- creating a very different culture.

Harvey Norman is the Australian pioneer of franchising. Gerry Harvey has been surprised that so few companies have followed his brilliant techniques.

But in supermarkets, Metcash is showing that the independent operator technique can be a winner and so it is gaining market share.

Coca-Cola, which has a stake in Asia, has an exciting local business plan for a mature company -- to be involved in every beverage market, including alcohol but excluding wine.

Among the domestic strategies none is more ambitious than Telstra, which is in the process of changing its entire technology base. This was essential because the revenue base that drove the company's profits -- landline phones -- are in sharp decline. The Telstra which will emerge will be much lower cost and much more market oriented.

It also aims to be a major new force in the media industry and of course it is also expanding offshore with the acquisition of China's largest property internet site.

It is important to realise that not all of these plans will succeed and almost certainly there will be a number of key failures which will grab headlines and will affect not only the company that fails but all those that have a similar strategy. On the other hand, out of these strategies will emerge some remarkable growth stories that will help drive returns for Australian superannuation investors.

It is these aggressive plans that are causing the private equity raiders to begin trawling the Australian stock market looking for target companies.

Our institutions have undertaken very little study of these long-term plans even though they will be the drivers of future value. It will be important that they don't continue to sell out cheaply, as they did with WMC and MIM and are likely to do with Qantas and Rinker.

The combination of more overseas investment by Australian companies and more overseas shareholdings will transform the long-term risk weightings of Australian superannuation funds away from Australia into a global orbit.

The detailed long-term strategies of each of the companies is set out on The Australian website under Vision 2010 in the business section