The battle for control of Southcorp between the Australian winemaker's board and rival Foster's took an unexpected turn today, when Southcorp chairman Brian Finn wrote to his counterpart at Foster's to suggest a merger of the two group's wine businesses.

Finn has proposed merging Southcorp with Foster's worldwide wine business (excluding Clubs & Services) by issuing approximately 650m to 765m Southcorp shares for the acquisition of the Foster's wine business on an ungeared basis. There would then be a pro rata 1 for 10 buyback of Southcorp shares following the issue at A$4.70 per share.

The deal would see Foster's take a stake of between 57% and 60% in Southcorp.
  
"We believe the proposal has significant benefits to both Foster's and Southcorp shareholders given that: we expect the transaction would be materially EPS accretive for both Foster's and Southcorp shareholders; Foster's would gain a controlling interest in the world's largest premium wine business with a significant international reach and scale, without further cash outlay; Foster's would be able to continue with its previously announced capital management strategy; the majority of the synergistic benefits outlined in the Target's Statement would still be available but the integration risk would be shared, and Southcorp shareholders would participate in the benefits of the merger of the wine businesses and we believe that they would be materially better off than selling their shares at A$4.14 per share," wrote Finn.
 
He added: "Importantly, we would both have created an Australian company that would have a leading international position in the world of wine, and in which both Foster's and Southcorp shareholders would participate. A key part of this proposal would be establishing governance and other protocols to reflect the balance between Foster's interest in Southcorp and public ownership of Southcorp shares, and to ensure that our combined wine businesses could grow as the world's leading wine company."

Finn said he expected the proposal would be implemented after the Foster's takeover offer expired and Foster's completed the acquisition of the 18.8% shareholding interest in Southcorp from Reline Investments Pty Limited.

However, in a statement released on its website, Foster's said today's announcement by Southcorp is "a clear acknowledgement that Southcorp is actually for sale".

It continued: "While Foster's will further consider Southcorp's merger proposal having regard to the best interests of its shareholders, it notes that the concept was raised by Southcorp and rejected by Foster's when the two companies were in discussions during their respective trading halts in mid-January 2005."

Foster's said its initial views are that Southcorp's proposal would result in substantial synergy leakage and higher execution risk compared to Foster's takeover offer for Southcorp.

"This would be a sub-optimal outcome for both Foster's and Southcorp shareholders; and it grossly undervalues Foster's wine business," the statement said. It added: "Southcorp's proposal serves only to endorse Foster's strong view that these two Australian companies should be combined to create the world's leading premium wine business. Foster's takeover offer, which represents the most compelling proposal for both Southcorp and Foster's shareholders and reflects the most realistic value of Southcorp, remains the best option for delivering this outcome."