Blog: Chris MercerWould you buy Foster's wine business?

Chris Mercer | 24 August 2010

Well, would you? No matter how much Foster's tries to spin it, the company's wine business is still on the painkillers.

The last 12 months have provided further grim testimony to the fact that Foster's paid too much for Southcorp's wine business in 2005 and was sorely wrong to attempt to mix grape and grain.

A whopping AUD1.3bn (US$1.16bn) impairment charge on wine assets has left Foster's more than just red-faced for the year to the end of June. It is the third time in as many years that one-off costs relating to the wine business have weighed on earnings: an impairment charge of AUD602m caused profits to plunge by 88% in 2008, while a restructuring charge of AUD400m pinned the firm down in 2009.

Wildly fluctuating currency rates between the AUD and those of key export markets, together with a daunting oversupply problem in Australia's wine industry, have exposed serious cracks in Foster's.

Now, having appointed new leadership and sealed fresh distribution deals in the US, in addition to ditching vineyards and brands, Foster's wants us to understand how its new-look wine business - Treasury Wine Estates - is "gaining traction" in key markets.

It is true that there are some positive signs. Wine earnings before interest and tax for the most recent year rose by 20.5% for the year if calculated at the same currency rates as in 2009 (yet this is an entirely theoretical exercise). Sales to the Americas would actually have grown modestly in value had it not been for currency rates.

Foster's has also made progress on its restructuring plan. More than two thirds of the 5,000 hectares earmarked for sale across Australia and California have been sold off, while the group has divested 37 non-core wine brands. Only five vineyards are left to be sold after another five were recently removed from the transfer-list.

"Our business is starting to look like it's fit to compete," said Foster's CEO Ian Johnston today. Did he mean 'fit for sale'? Afterall, the group's planned demerger of its beer and wine arms is widely expected to attract suitors for the two businesses.

Try as Foster's might, however, things still don't look great - as the company itself admitted today to its credit. "We do expect market conditions in the wine category to remain mixed," Johnston told analysts.

"Despite signs of improvement at the macro level, the wine industry still faces the same issues that have constrained returns for the last couple of years – Australian wine oversupply, soft consumer sentiment in key export markets, negative currency shifts and in the northern hemisphere, growing competition from new world producers," said the firm in its results presentation.    

Hardly an enticing prospect for the time being, is it?


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