In the Spotlight – Foster's Group
Who's said what about Foster's this week?
News this week that the firm is looking to split its wine and beer businesses may be the solution to Foster's ills that many are hoping for, according to analysts, who believe the split potentially makes the two businesses strategically more appealing as takeover targets.
“Although Foster’s has been subject of takeover speculation for the past number of years, the major hurdle has been a ‘solve for the wine business’,” Greg Dring, an analyst at Macquarie Group said in a note to clients.
However, while the split should generate value for shareholders, it will saddle both businesses with higher costs, analysts have warned.
Goldman Sachs analyst Ian Abbott told the Wall Street Journal that costs associated with the split would probably run to about AUD200m (US$169m), while the need to create separate corporate support structures would add between AUD5m and AUD10m to each division's annual costs.
On the other hand, UBS believes the split could be executed for just AUD30m, with annual overheads rising by between AUD10m and AUD20m.
Yet Abbott says a split could leave investors with shares in two companies with a combined value around AUD1.25 greater than their existing Foster's stock, which closed at AUD5.54 on Wednesday, its highest finish in more than five weeks and an 8% increase since news of the split was announced.
Indeed, assuming a deal to demerge Foster's business is struck early next year, shareholders will be left holding shares in two publicly-listed companies that are undisputed market leaders in beer and wine in Australia.
The beer division would own a portfolio of beers, holding the number one position in regular, overseas and domestic premium, low-carb, light beer and cider, and generating a profit of about AUD540m a year.
On the other side, meanwhile, would sit the wine unit, an owner of both popular and established wine labels that could deliver as much as AUD140m in annual profit.
But it is the beer division in particular, the jewel in Foster’s crown, which many analysts believe is likely to attract significant interest from international brewers.
Theo Maas of Arnhem Investment Management in Sydney told the Wall Street Journal that the firm’s beer business, worth more than AUD13.5bn (US$11bn), is likely to draw interest from Suntory Holdings and Sapporo Holdings.
“A separate beer unit may attract a takeover offer from Coca-Cola Amatil and SABMiller, who are building an Australian brewery together,” Theo Maas at Arnhem Investment Management in Sydney told Bloomberg.
“Coca-Cola Amatil and SABMiller are number one on my list,” he added. “The beer business as a standalone business is not going to remain independent for very long.”
Foster’s wine business however, with brands including Penfolds, Wolf Blass, Beringer, Lindemans, Mildara and Rosemount Estate, has proved more volatile.
Investors and industry analysts have for years urged Foster's to rid itself of the wine business, which has been producing poor returns and weighing on the group's performance.
While international brewers have long coveted Foster's beer operations, they were never likely to act if a sale included the wine portfolio, according to the Financial Times, which was built up at the height of the market at a cost of close to AUD7bn.
Wine industry analyst Professor Kym Anderson, from the University of Adelaide, told ABC this week that he is not surprised by the demerger and can foresee even more break-ups in the wine group.
"There is such a wide spectrum of brands and a huge number of brands within that big group, many of which overlap," he said. "So there's lots of room for rationalisation either as a Foster's firm, or perhaps splitting up some of those labels."
Ray King, who ran the wine business for three years after Foster's bought Mildara Blass in 1996, believes the demerger is a culmination of "stupid" wine acquisitions, a poor management culture nurtured by monopoly positions in the beer market and the changed economics of the wine industry.
In particular, he told the Wall Street Journal that the firm’s US$3.2bn Southcorp buy in 2005 was “just stupid”, adding that Foster’s was “seduced by the mythology surrounding the Penfolds brand”.
According to King, Foster's thought the favourable wine industry dynamics of the 1990s, when it bought Mildara, would last forever. Foster's shareholders have since learned otherwise, to their detriment.
The key question for investors now is the long-term value of each stand-alone business - especially as Foster's share of the beer market is being eroded, while the outlook for the wine sector is clouded by a grape glut and dwindling margins.
Foster's Group has said it intends to contest income tax assessments it has received from the Australian Commissioner of Taxation....
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