Foster’s plans sell off

Foster’s Group plans a quick sale of six wine brands, Australasian wine clubs including Cellarmaster and other assets as it hurries along its rationalisation of Southcorp, the company it took over for A$3.7bn (£1.48bn) in May last year. The brands on the block are Great Western whose sparkling wine was once a market-leader, Robertson’s Well, Andrew Garrett, Edwards & Chaffey, Rouge Homme and Glass Mountain.

The springclean is part of chief executive Trevor O’Hoy’s drive to finalise the integration of Southcorp into Foster’s Group, which he said in mid-December had been too slow, writes Selwyn Parker.

The wine clubs will fetch the biggest price, between A$200-250m according to market sources. They include Cellarmaster with 350,000 customers accounting for about half of all direct-mail wine sales in Australia. Also up for sale will be three winery assets worth around A$45m – Penfolds white wine facility in the Barossa Valley in South Australia, Seppeltsfield winery nearby and Rosemount winery in the Hunter Valley, New South Wales.

The sell-off, which was revealed in internal emails reported in the media, coincides with pressure on O’Hoy to boost profits. Although the company has not been the subject of a formal approach, it is reportedly being stalked by private equity firms attracted by the robust cash flows from Foster’s beer business based on VB and Foster’s lager brands.

As the integration of global beer markets accelerates, InBev and SABMiller have also been cited as potential buyers.

The urgent clear-out of labels is taking place as the domestic industry battles with a continuing, but declining, glut in domestic production and a fall in the value of Australian exports. The current wine surplus is 500 million litres, according to the Australian Wine and Brandy Corporation. A sustained drought has been a factor in the decline in the volume of unsold wine by limiting production. Even so, analyst Paul Ryan of Goldman Sachs estimates "we’re two years from supply balance."

Perhaps more worrying for Foster’s as it sorts out Southcorp are the falling margins in export markets.  In the year to September, the value of Australian exports fell for the first time in 15 years, down 0.6% to A$2.78bn despite record offshore sales. According to the Wine and Brandy Corporation, this was attributable to a decline of 7% in the average price per litre.

Among other wine producers, O’Hoy has repeatedly complained of low margins in the highly competitive UK market and Foster’s is now trying to reduce its dependence on Britain. But unless Australian wineries can cut production costs, market observers such as Hugh Giddy of investment firm Perennial Partners don’t see much room for optimism in the medium-term. "If we don’t produce wine more cheaply, demand will shift elsewhere," he predicted.

© db 20 December 2006