Treasury is no treasure chest

It is a textbook example of how potentially damaging diversification can be. Foster’s 15-year flirtation with wine came to an end earlier this week when Treasury Wine Estates gained its own Australian stock market listing and left long-suffering investors in the beer company nursing cumulative write-down losses of almost £2 billion.

When Foster’s first ventured into wine in 1996 by spending just over £300m on Mildara Blass, investors hailed it as a sensible strategy. The Australian beer market was maturing rapidly and Foster’s itself was being eclipsed globally.

What could be more appropriate than to merge the sales and distribution operations of two supposedly closely-linked products, especially as Australian wine was riding the wave of growing international consumption?

When Fosters spent £1.7bn on Beringer in 2001 and a further £2bn on Southcorp in 2005, it became the world’s second-largest wine production group. It had also sailed headlong into a perfect storm.

Beer and wine don’t mix, except at the point of sale, and Australia suffered a wine glut at the same time as its currency appreciated on the back of growing demand for its abundant natural resources.

So Foster’s slashed prices to shift stock, undermined the market for quality Australian wine and watched the losses mount, so much so that the profitable beer division itself was hamstrung and has become a potential takeover target. The wheel had turned full circle.

Even at the end the Foster’s board managed to get less value from Treasury for shareholders than could have been achieved. Only last September Cerberus Capital Management, a US turnaround house, offered £1.65bn for Treasury but was rebuffed by Foster’s, which said the bid undervalued its wine arm, putting a price tag of £2.3bn on it. When Treasury made its debut on the Australian stock market on Monday, investors valued it at just under £1.5bn.

Which leaves Treasury’s shareholders (who got one Treasury share for every three Foster’s in the split) wondering whether at last they will begin to see improved returns. Based on a tangible book value of AU$1.97bn (about £1.3bn) and the Cerberus bid last year, analysts reckon the shares should trade in a range between AU$2.75 and AU$3.5 for the foreseeable future. Yesterday they closed at AU$3.4.

Certainly the demerger from Foster’s allows investors greater clarity about Treasury’s true worth and removes some pressure on managers competing for financial resources with the beer division.

It has annual sales of about £1.25bn from 35m cases and chief executive David Dearie plans to strip a further £65m of costs out of the business by the end of next month, when he completes a rationalisation of packaging, bottling and warehousing.

Shorter production runs (i.e. higher quality) for brands such as Wolf Blass should improve the financial picture, while increased penetration of China’s market for wine is a key strategy behind growing volumes and margins simultaneously.

But will Dearie get a chance to prove his plans work? Could Cerberus or other suitors make a takeover bid? While the market values Treasury at below what Cerberus planned to pay last autumn, the value of the Australian dollar, which is at a 30-year high, makes it comparatively unattractive, especially to an American group, at least for the moment.

Finance on Friday, 13.05.2011