News

Foster’s to hold on to wine business

20 February 2009 By Ron Emler

Foster’s Group is keeping its struggling $A5bn wine business following a review of its entire operations that began last June. Many analysts predicted that Foster’s would like to sell the division – if it could find a buyer.

But announcing the review’s findings, chairman David Crawford said: “The current difficult conditions in debt and equity markets mean that this is not the appropriate time to sell or demerge the Foster’s wine business.” Most translate that as meaning that no satisfactory offers were made.

Most commentators think that in 2005 Foster’s overpaid for Southcorp, Australia’s biggest wine group, and then failed to merge it successfully with its existing Beringer interests in California. Foster’s is now having a second attempt at “reshaping” its wine business before potentially offering it for sale when it has sorted out its oversupply and weak imaging problems.

It plans to focus on better margin products and produce cost savings of about $A100m by 2011 through cutting about 300 jobs and selling 36 vineyards, about a third of its acreage. Also for sale are about half the wine brands in the portfolio, which together account for only about 5% of the division’s sales. Three wineries (two in Coonawarra and one in central California) will be closed or sold and the wine interests are to be separated from the beer division to give greater focus, especially to the sales force.

Underlining the need for change, chief executive Ian Johnston said: “The performance of our wine business has been unsatisfactory.” In the half year to the end of December, Foster’s global wine earnings before interest and tax rose 10.6% to $A243m, but would have fallen 11.6% compared with the same period in 2007 had there not been favourable currency movements. Overall, in the year to the end of June Foster’s expects to write down about $A1bn in the value of its wine assets.

Doubts remain, however, about Foster’s ability to earn a satisfactory return on capital employed from its wine business, which includes the Penfold’s, Lindemans and Beringer brands. The return is under 10% based on the book value of $A5bn, which may explain why no real interest was forthcoming from potential buyers, especially bearing mind the difficulty of raising debt in the present market.

But making the wine business effectively a stand-alone entity raises questions about the future of the beer division. Molson Coors Brewing, the North American brewer, has a 5% stake in Foster’s but has not given the Australian company any clues about its intentions. One option could be to target a takeover of the beer division and demerge wines as a separate company once the restructuring has taken place.