Blog: Chris Brook-CarterTo death or glory?

Chris Brook-Carter | 26 January 2005

The wisdom of Foster's bid to take over the Australian wine giant Southcorp and the possibility of a rival bidder are still splitting opinion amongst industry watchers.

I read the most damning verdict yet of Foster's plans in a copy of The Age today.

It claimed that, "Southcorp shareholders should not hold their breath waiting for a counter-offer - Foster's Group is already paying too much."

It went on: "In fact, so expensive and risky does its A$4.17-a-share bid look that the Foster's board and management have probably sown the seeds of their demise. There must now be a good chance of another big wine write-off in a few years accompanied, this time, by a bloody cleanout of the top floor."

The article argued that Foster's needs to get Southcorp's earnings up by about A$150m, or find synergies of that amount, to make the deal worthwhile. Using net profit as an indicator instead of EBITDA, the figure needed is more like A$300m. "Is any of this possible? Not without ruining Penfolds," the author predicts. 

And yet, broking house CommSec is still suggesting that a rival bid may materialise and force a takeover price of up to A$4.70. That would value Southcorp at A$3.5 billion - A$400m more than Foster's bid.

"We expect Foster's will be the ultimate successful bidder because of its strong combination of cost savings and revenue gains, but will need to pay closer to $4.70," the broker said in a report.

Commsec also came up with a very interesting scenario for Foster's main rival in the battle for control of Southcorp. Rather than the arrival on the scene of one bidder in the form of Allied Domecq or Diageo, CommSec believes a more likely outcome is a joint bid involving US-based Constellation Brands, owner of Hardys Wines, or Pernod Ricard, owner of Orlando Wyndham and its Jacob's Creek brand.

"Their Australian production would lead to large cost savings," CommSec said.

So which is it to be for Trevor O'Hoy and the Foster's board - death or glory?


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