Elders Ixl Ltd.

One Garden Street

South Yarra, Victoria 3141
Australia
249–2424

Public Company
Incorporated: December 1981
Employees: 45,000
Sales: A$7.658 billion (US$5.081 billion)
Market Value: A$1.485 billion (US$985.7 million)
Stock Index: Melbourne Sydney Adelaide Brisbane
Perth Hobart London Hong Kong Paris Tokyo Zurich
Frankfurt

Elders IXL is the largest company in Australia. While it may be considered a conglomerate, Elders is particularly strong in brewing. It has a well-established reputation for acquiring companies whose performance is poor and transforming them into highly profitable businesses through the introduction of modern management methods and strict financial control. As a result, the modern Elders group has grown into a large and highly competitive company which has achieved phenomenal growth, averaging an annual 33% increase in pre-tax profits since 1981.

The man primarily responsible for the creation of Elders IXL is John D. Elliott, an honors graduate in commerce who earned an MBA from Melbourne University. After two years working for Broken Hill Proprietary, Elliott spent six yeárs as a consultant with McKinsey & Company, an international management consulting firm. During this period he became familiar with the mining, retailing, and chemical industries, and worked extensively in Australia and the United States.

A large Australian food products company called Henry Jones IXL came to the attention of John Elliott in 1972, after that company solicited McKinsey & Company for advice on ways to strengthen its financial position. Henry Jones IXL suffered from outdated management and poor financial control, and had become vulnerable to a hostile takeover. Recognizing the potential of the company under proper management, Elliott organized a consortium of investors, which by December of 1972 had raised A$30 million to purchase it.

The company Elliott and his group purchased had well-established brand names and was quite well known for its fruit preserves and jams. The company was based in Hobart, Tasmania, where it was established by Sir Henry Jones in 1889. Sir Henry was unable to read or write, and at the time had no distinguishing title. So, when choosing a name for his company, he selected three letters from the alphabet I, X, and L to convey the message “I excel.” When the company was taken over by John Elliott 90 years later, he pledged to retain the three letters for their valuable character.

As managing director of Henry Jones IXL, Elliott immediately implemented new management policies aimed at revitalizing the company. With funds raised through the sale of Henry Jones IXL’s lower yielding assets, Elliott engineered the A$6 million takeover of another Tasmanian fruit canning company called Tom Piper Ltd. With the addition of Tom Piper, Henry Jones IXL had doubled its profits by the end of 1973.

When the United Kingdom entered the European Economic community in 1975 it ended many of its preferential trade agreements with Commonwealth countries such as Australia. As a result, many Australian companies were excluded from traditional markets in Britain, damaging the Australian fruit canning industry. Henry Jones IXL’s profits fell from A$3.7 million in 1974 to 1.7 million in 1976. The company’s recovery from this situation, however, was well-planned and carefully executed.

In 1978 Elliott initiated a three-year program of external growth (growth by acquisition) as part of an effort to diversify into a broader range of operations. That year Henry Jones IXL purchased two smaller firms, Alva Jams Pty. and W.H. Johnson Pty. and the following year took control of J.R. Wyllie and Sons and Provincial Traders Holding Ltd., a large edible oils concern. In 1980 Henry Jones IXL acquired Barrett Burston (a maltster and producer of animal feeds), and the Australian operations of Wattie Pict Ltd., a large frozen foods company based in New Zealand. By 1981 Henry Jones IXL also had acquired interests in engineering, agricultural products, lumber, and media.

During 1981 Elder Smith Goldsbrough Mort (ESGM), a major shareholder in Henry Jones IXL, had become the target of a hostile takeover by the financier Robert Holmes a Court and his company Bell Resources. It was conceivable that, if successful in acquiring ESGM. Bell Resources could easily gain control of Henry Jones IXL. When Bell had accumulated a 19.9% share of ESGM, a group of investors friendly to ESGM (which included Henry Jones IXL) initiated a defense by purchasing a separate 20% share. A bidding war became increasingly undesirable to all parties concerned. At that time a complex agreement was reached wherein a fourth company, Carlton & United Breweries, would acquire ESGM’s interest in Henry Jones IXL in addition to Bell Resources’ interest in ESGM. ESGM would then “acquire” Henry Jones IXL (the reverse actually occurred), to form a new company called Elders IXL. While ESGM did, in fact, acquire Henry Jones IXL for A$149 million, John Elliott and his management team assumed control of the new company. Carlton and United Breweries emerged from the compromise with a 49.4% “friendly” interest in Elders IXL.

ESGM was originally created by a merger in 1962 between Elder Smith and Goldsbrough Mort & Company. The largest of these concerns, Elder Smith, was established in 1839 by a 24-year old Scotsman named Alexander Lang Elder. Elder Smith was primarily involved in animal husbandry and raising livestock. Goldsbrough Mort, founded in 1888, was a wool trader and dumper (wool dumping is the process of concentrating wool into bales for shipping). When the two companies merged, they created one of the largest pastoral companies in Australia.

Like Henry Jones IXL before John Elliott, ESGM was characterized by outdated and highly conservative management techniques. In the process of creating Elders IXL, Elliott corrected these problems and transformed the ESGM operations into modern and profitable divisions. Within four months of the merger, Elders IXL launched a A$115 million takeover bid for Wood Hall Trust, a British construction firm with significant pastoral interests in Australia and a worldwide network of trading offices. The incorporation of Wood Hall Trust into the Elders Group strengthened the ESGM finance business, consolidated Elders’ position in pastoral activities, and provided the group with a strong foothold in international trading. The acquisition also provided Elders IXL with a listing on the London bourse.

In July 1982, only four months after the acquisition of Wood Hall Trust, Elders IXL purchased a 19.9% share of Bridge Oil Ltd. Elders continued to purchase companies through 1983, acquiring West wools Holdings, F.J. Walker Ltd., Mayfair Foods, and Commercial Bureau (Australia) Pty., which operated a trading office in Moscow.

During the two years since its compromise agreement with Bell Resources, Elders IXL considered its shareholding arrangement with Carlton & United to be undesirable, but had never found an opportune moment to resolve the issue. Suddenly, in November 1983 Elders was threatened by an indirect takeover as a result of its relationship with Carlton & United. An Australian investment company called Industrial Equity Limited (IEL) indicated its intention to take control of Carlton & United, which still held a 49.4% interest in Elders IXL. If successful in acquiring Carlton & United, IEL could easily gain control of Elders.

Elders was forced to mount an immediate defense. Within a week the company raised A$980 million through a syndicated bank loan, and announced its intention to acquire Carlton & United. Elders succeeded in purchasing not only lEL’s interest in Carlton & United, but several other large blocks of shares. Elders emerged with a majority of shares, and six months later completed its takeover of Carlton & United with the acquisition of all remaining shares.

Elders paid A$998 million for Carlton & United, using mostly borrowed funds and raising its debt-to-equity ratio to 5.3:1. The acquisition was not, however, purely opportunistic or defensive; brewing had long been identified by Elders management as an area worthy of investment. It also forced Elders to identify which areas were to become its “core” businesses, and to implement a stricter divisional organization. The General Jones processed foods operation was sold in 1984, as were a number of other secondary businesses. Bridge Oil and Elders’ 20% share in Kidston Mines were sold to another subsidiary called Mungana Mines (subsequently renamed Elders Resources). Greater concentration was placed on the brewing industry, and, in particular, creating an international market for Foster’s Lager, Carlton & United’s most popular beer.

In an attempt to enter markets in the northern hemisphere, Elders management decided to acquire an established company in North America or Europe. During the spring and summer of 1985 Elders accumulated shares of Allied-Lyons, a British beverage company, and in October announced its intention to purchase the company for £1.68 billion. Allied-Lyons took a number of defensive actions and asked the British Monopolies & Mergers Commission to review the matter for possible antitrust violations.

During the MMC investigation, Elders became involved in a takeover battle in Australia which weakened its financial position enough to prevent a successful bid for Allied-Lyons. Early in 1986 Robert Holmes à Court attempted to gain control over Broken Hill Proprietary (BHP), Australia’s largest industrial mining concern. Elders and BHP had a common interest in preventing the takeover. In April the two companies agreed to exchange a large enough number of shares to ensure that hostile bidders would not be able to gain control of either company. Elders emerged from the cross-investment scheme with an 18.6% share of BHP.

Elders was given permission to proceed with the takeover on September 3rd, 1986. By that time, however, Elders had abandoned it bid for Allied-Lyons, and instead entered into negotiations with Hanson Trust Pic to purchase Courage, one of Britain’s largest breweries, for £1.4 billion. The takeover was completed on September 18, and the ensuing months proved once again the ability of Elders IXL to acquire and revitalize companies much larger than itself.

Six months later Elders raised A$875 million in a rights issue, and almost immediately announced the purchase of a 50.1% share of Carling O’Keefe, the third largest brewing company in Canada, from Rothmans Inc. The remaining shares of Carling O’Keefe were purchased at C$18 per share, bringing the total cost of the acquisition to C$392 million.

By the end of March 1987, Elders IXL had built an international brewing network which consisted of Carlton & United in Australia, Courage in Britain, and Carling O’Keefe in Canada. In achieving this network, however, Elders incurred further debt, depressing its valuation to a level lower than the sum of its individual parts, and creating pressure for a break up of Elders IXL. In order to prevent the break up of Elders IXL, Peter Scanlon, a fromer strategist with Elders, proposed the establishment of several independent Elders companies organized by operation, each controlled by Elders IXL, which would remain head of the group. By listing some of these companies overseas, Elders could reduce its exposure to high rates of taxation in Australia.

Scanlon headed an investment company called AFP (for Australian Forest Products), in which John Elliott was also a partner. In order to prevent corporate raiders from gaining control of Elders and selling its divisions at a premium, AFP began to accumulate options to purchase shares of Elders stock as early as September 1986. By the following August AFP held options to 40% of Elders, which, with the BHP cross-investment, thoroughly protected the company from a hostile takeover.

In August 1987 Elliott announced that Elders IXL would divide its assets among four separate companies. Carlton & United, Courage, and Carling O’Keefe would be placed with a new company called the Elders Brewing Group, listed in London (where the corporate tax is 13% lower than in Australia). Elders’ various merchant banks and other financial interests would be placed under another foreign-domiciled company called the Elders Finance Group. The company’s pastoral and international trading operations would be placed with the Elders Agribusiness Group, which would remain in Australia. Elders Resources, created in 1985, would remain in charge of Elders’ numerous natural resource assets. The following month it was announced that a fifth company called Elders Investments Ltd. would be registered in Hong Kong, and would take over the group’s international finance business.

Elders IXL will sell 35% of each new company, with the exception of Elders Resources, in which it plans to retain only a 48.5% share. Capital raised from the sale of these shares will substantially decrease Elders’ debt load, and may eventually lead to the resolution of its defensive crossinvestment with BHP. Presently, Elders IXL is the sixth largest producer of beer in the world, and is in an excellent position to establish its Foster’s Lager as a “world brand.”

John Elliott has been an outspoken opponent of government policies toward business (and in particular, corporate taxation) under the Labor Party administration of the Australian Prime Minister Bob Hawke. Elliott has frequently been spoken of as a candidate for national office with the opposition Liberal Party, of which he is treasurer. Members of Elders management, as well as fellow partners at AFP, expressed strong concern that Elliott would be lured away from their companies to enter politics. In October 1987, however, Elliott agreed to remain with these companies through 1990.

Principal Subsidiaries

Prior to the reorganization of Elders IXL in 1987, the company listed 384 subsidiaries; as a result of the reorganization, Elders now lists five subsidiaries: Elders Brewing Ltd. (65%) (U.K.); Elders Finance Ltd. (65%); Elders Agribusiness Pty. (65%); Elders Resources Ltd. (48.5%); Elders Investments Ltd. (65%) (Hong Kong).