auded as a model of the modern brewer as it diversifies into wine, Foster's has still had trouble convincing investors of the prudence of its drive. Given the continued increase in profits David Robertson investigates the market's fears.

For the longest time brewers have been convinced that diversifying out of beer is essential to boosting share price in the new economy. Many bought into spirits and now it is wine that has the brewers hot and bothered. Wallets have been opened and wineries are changing hands at astonishing prices.

Analysts have identified Australia's Foster's Group as being a clever and cunning example of this shift from old world beer to new world wine. It is seen as a role model, particularly after the A$2.9bn purchase of US-based Beringer Wines, for other brewers and drinks conglomerates.

But if Foster's has been so successful in making the shift from stale beer to exciting wine why hasn't its share price rocketed?

The painful truth is that after the initial buzz surrounding the Beringer deal, Foster's share price has been in seemingly terminal decline. Last June the group was worth A$5.73 a share but this week it is down to A$4.73. So much for new world.

It isn't the headline numbers that are upsetting investors. Foster's revealed a 25.7% increase in profit before interest and tax (EBIT) to $555.5m in the six months to the end of 2001. The shift to wine was vindicated by a mere 5.5% increase in EBIT at Carlton & United Brewing while Beringer Blass bounded ahead with a 49.2% growth in EBIT.

What worried analysts was that cash flow had slipped 70% to A$58.4m. Investors have got used to Foster's dishing out large dividends on the back of CUB's massive cash flow (the company had nothing else to do with its cash other than give it back to shareholders) and it seems that the cash-intensive Beringer is rattling a few cages - despite Foster's assurances that cash flow will be back up to $400m by the end of the financial year.

Foster's is determined not to let this worry about a (relative) lack of cash stop it from pushing further into the wine sector. It picked up Hawkesbridge Wines in New Zealand's Marlborough region this week as part of an on-going strategy to build its already substantial portfolio. In the six months to the end of 2000 wine accounted for 35.4% of Foster's business and beer 50.6%. A year later wine was up to 43.2% and beer 44.3% - Foster's is clearly no longer a name that can automatically be equated with Australian beer.

A number of well placed analysts last year predicted that some time in late 2003/2004 Foster's would again hit the acquisition trail and Beringer Blass's new managing director Walt Klenz admitted as much a couple of months ago when he pondered aloud about a possible bid for the A$4bn Californian company Kendall-Jackson sometime in 2003.

Foster's is determined to push ahead with wine but it would be unfair to dismiss investors' worries as merely an overreaction to the reduction in cash flow. Breweries around the world are buying up wineries with seemingly little regard for the cost. They are using their huge cash flows to buy cash-intensive businesses so no wonder there are a few jitters.

Foster's is getting the early backlash but it seems reasonable to expect others to suffer in the next 12 months when the gloss starts to fade.