Comment - Foster's takes the plunge
Foster's has paid a high price for Southcorp
They said that it would be the birth of "Brand Australia" on the world wine market, but the gift of hindsight shows us that Foster's' acquisition of Southcorp in 2005 may have, instead, precipitated the beginning of a long, slow death.
Foster's will know that today's decision to demerge its beer and wine arms could spell the end of independence for its Australian beer business and may expose prized assets in its wine operations to looting.
Some analysts warned in 2005 that Foster's had paid a high price - more than US$3bn - to win Southcorp and questioned whether the deal would be in the best interests of shareholders.
But, with global markets buoyant and consumers in the UK in particular still guzzling mainstream Australian wines, the momentum of the deal overrode the warning signs.
Foster's loaded itself with debt to buy big in Australian wine just as the tide began to turn.
Around two years earlier, Constellation Brands also bought into Australian wines in a big way, acquiring BRL Hardy for around US$1bn. It is worth noting that Hardy's, too, has caused problems for Constellation and came close to being handed over to Australian Vintage earlier this year.
You will not need reminding that, in the last couple of years, Australia has faced a perfect storm of more competition in key markets, wild currency fluctuations, the global economic downturn and, in the end, a chronic oversupply of wine. Indeed, industry figures suggest that the country is producing up to 40m cases of wine more than it is selling.
Foster's has struggled to deal with the situation, or at least was slower to react than some of its rivals. At the same time, Foster's' decision to combine beer and wine sales and distribution has failed to fully meet the needs of either business.
"While the beer and wine businesses are market leaders, they operate in separate market segments with different strategic and operating characteristics," said Foster's CEO Ian Johnston today.
Investors reacted positively to news of an official demerger, sending the Foster's share price up 7%.
Demerging the businesses makes financial sense and the further AUD1bn impairment charge on wine operations in this fiscal year will put the wine business at a fairer market value.
However, the move is bound to invite takeover speculation, particularly around Foster's' more attractive beer arm. Foster's itself today signalled that it was open to offers.
It remains the largest brewer in Australia, despite market share losses and the obvious need to adapt to a new generation of consumers seeking lighter styles of beer.
As for wine, Foster's has busied itself with draining a long tail of underperforming vineyards and brands, but labels like Wolf Blass and Rosemount might well catch the eye of rivals - particularly if those assets are more competitively priced.
Don't expect deals any time soon, though. Foster's does not expect to complete the demerger until early 2011, which means at least six months of speculation ahead.
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