Investment bank Merrill Lynch has suggested breaking up the Australian drinks group Foster's to restore shareholder value because its wine division is underperforming.

In a research note the bank said: "Investors need to recognise that it is very difficult to generate acceptable returns in wine."

Merrill has a "sell" recommendation on Foster's.

"Our view is that Foster's needs to break itself up to avoid further loss in shareholder value. And although the value of the break-up may not differ significantly from the current share price, it would prevent further capital being lost in the future, " Merrill Lynch said.

Merrill Lynch said its "sell" recommendation on the stock was based on Foster's decision to buy Southcorp.