Foster’s Southcorp bid

Acquisition will make the world’s largest premium wine company, says Chris Orr

THE HEADLINE on the Financial Review, Australia’s leading business paper, read quite simply "Southcorp ripe for plucking."  The paper ran the story on the 12th of January.  The next day, Foster’s announced it had bought out the Oatley family’s 18.8% stake in the company – a move that took the Southcorp board by surprise – and made clear it’s desire to launch a takeover bid.

 The value paid for the Oatley family shares gave the company a share value that, combined with Foster’s, would place a A$14bn market capitalisation on the new entity and make it the world’s largest premium wine company overnight.

However, the signs are that the Southcorp board are not going to go down without a fight. Foster’s initial bid, which swiftly followed the FR’s breaking story, has been dismissed by the Southcorp board, with Southcorp chairman Brian Finn explaining, "the board has informed Foster’s that it is not prepared to recommend the offer as it does not adequately reflect the strategic value of the company."

However, Southcorp are playing a potentially risky game.  Whilst share prices have jumped significantly for the company, Foster’s share price has shown significant drops, reflecting the analysts and financial market’s view that it will be a tough job to extract value from the company, despite the improvements made by chief executive John Ballard to Southcorp’s performance over the last two years.

Importantly the bid works out to be 14.9 times earnings.  If it goes ahead, that would make it the most generous and lucrative bid for a wine business and rests at marginally more than Constellation’s purchase price for Mondavi.

In this light, it seems difficult to see how Southcorp could raise the bar in value terms, except by launching a bidding war.  This, of course, relies on the compliance of the other major players to play ball.

At the time of writing no other major company has made an offer for Southcorp, though Pernod Ricard, Allied Domecq, Diageo and Constellation are circling.  Only days after the news of the bid broke, Robert Sands, Constellation’s chief operating officer, flew into Australia, apparently on a "scheduled" visit, but refused to be drawn to comment on the Foster’s bid.

Keen watchers of Constellation’s previous purchases will note that the company rarely confirms even interest in a deal until the deal is done.  Speculation has naturally been rife and one strong theory is that the Oatleys have been canny in their sale of shares to Foster’s.

Bob Oatley, the main family shareholder, has been frustrated by the diminishing influence he and the family have in the Southcorp boardroom.  He is also fiercely protective of Rosemount. Should the Foster’s bid go ahead, he has already indicated that he would be willing to reinvest the money from his sale of shares in the new entity.

Alternatively, should the Australian mergers and monopolies commission question the power that the deal would hand to Foster’s they may agree to buy the company, but divest itself of the Rosemount business.

Oatley would undoubtedly be first in line for the purchase and with an estimated wealth of A$1.1bn, he would have few problems affording it.  Should that not be the case, and someone else gets their hands on Southcorp, they may still have to put up with Foster’s as a major shareholder in the business – a relationship that may not stand the test of time.