Australian winemaker Southcorp has released a counter-proposal to Foster's takeover bid.
Southcorp has opposed Foster's current bid, saying that it undervalues the company, while Foster's says that the new plan overvalues Southcorp. Neither position is particularly surprising. However, the announcement keeps the deal alive, and gives Foster's a reason to increase its offer. It could be well-advised to do so, given the importance of Southcorp to its future in the wine business.
Southcorp, which is currently the subject of a takeover bid from Foster's Group, has presented Foster's with an alternative offer. Southcorp suggests that it should merge with Foster's Beringer Blass wine business, forming a separately listed company in which Foster's would have a 60% stake.
Southcorp has also issued an independent estimate of its own value, claiming that, based on forecast 2006 earnings, the business is worth A$4.57-4.80 per share. The report also claims Southcorp is worth A$5.84-5.97 per share to Foster's, after taking the synergies with Beringer Blass into account. Foster's current bid price is A$4.17.
Unsurprisingly, Foster's has not warmed to the proposal. It says that Southcorp is exaggerating its value, claiming that a valuation of A$3.10 would be more appropriate. It also says that the plan to merge wine businesses, rather than fully integrating the two companies, would significantly reduce synergies.
An additional, unstated reason for Foster's objection is that the new plan would leave Southcorp's current management in charge. Part of Foster's logic for making the bid is its belief that Southcorp has underperformed because of weak management. It would therefore be understandably reluctant to merge its main growth business into a company run by the same people.
Nonetheless, the announcement makes a Foster's/Southcorp merger far more likely to happen. The target company has effectively admitted it is up for sale, and begun the process of negotiating a price. The ball is now firmly in Foster's court and the company needs to decide whether to raise its offer.
It should do so. As the wine industry gets ever more focused on branding and marketing, Foster's needs to build its scale and geographical reach to compete with rivals such as Constellation Brands. Given that it is the last major Australian-based winemaker still for sale, Southcorp will be Foster's best chance to cement its market position.