Dr Vino's wine blog

Brian Finn, chairman of Australia’s embattled Southcorp, has issued a letter to shareholders stating that “Foster’s offer of A$4.17 may be just its opening bid.” The Foster’s bid values all of Southcorp at A$3.1 billion ($2.35 billion).

Yet with no other suitor yet emerging, Foster’s controlling 18.8% of Southcorp shares, and Foster’s shares taking a licking in the stock market for fears of overpaying, it’s not clear how Finn hopes to rally resistance to the takeover.

Given that Southcorp barely eked out a profit in the first half of this fiscal year after a A$929 million ($709 million) loss last year, Finn is not bargaining from a position of strength. The combined company would control a third of the Australian wine market, produce Penfold’s, the country’s most expensive wine, as well as the biggest beer, Victoria Bitter.

Will Foster’s raise its A$4.17 per share offer price to meet the market’s 6.5% premium with Southcorp’s shares trading at A$4.44? It’s hard to see them bidding against themselves. As bitter as the news may be for Finn, maybe he’ll switch from drinking Penfold’s to Victoria Bitter.

Southcorp, the struggling Australian wine producer, has rejected a A$4.17 a share take over offer from Foster’s, the brewer and wine maker, which values the company at A$3.1 billion ($2.35 billion) as “inadequate and opportunistic.” The market seems to agree having bid up Southcorp’s shares as high as A$4.50.

Has everyone had a little too much Shiraz?!?

Southcorp’s main brands have not been doing well as they have struggled to successfully integrate Rosemount since acquiring it in 2001 and resorted to in-store discounts to move that and some of its other brands. Now they expect multiple bidders?

There are only three other companies that could really be interested: Constellation (US), Diageo (UK), and Allied Domecq (UK). Constellation is unlikely to make a bid. Having already bought BRL Hardy–when the US dollar was much stronger–they already have good exposure to Australia. Further, they just gobbled up Robert Mondavi for $1.36 billion. Better to digest that one first.

Diageo could pay above the Foster’s bid. Formed by the merger of Grand Metropolitan and Guinness, the transaction size would not be big for this maker and distributor of wine, beer, and spirits with nearly $20 billion in annual sales. But given their global reach, would they want to hunt the wounded beast that is Southcorp? Certainly they did trump other bidders in their acquisition of Chalone last month.

Allied Domecq is probably the most likely rival to Foster’s. Their diverse holdings include Maker’s Mark bourbon as well as Dunkin’ Donuts and Baskin Robbins. So with wine in growth mode, if management wanted to add more wine to their portfolio, this is a big opportunity for them to do so. The currency is not such a negative factor as it would be for say Constellation since Allied Domecq is a UK company.

But many investment analysts say that Foster’s bid is a “mistake” and shares of Foster’s have traded down 10% on the news. Citigroup analyst Dawn Oldham in Melbourne values Southcorp at $2.90 a share. Further, a Foster’s acquisition would cannibalize sales of Foster’s existing Australian brands she says.

So the white knight that Southcorp’s chairman Brian Finn and the markets are anticipating may not arrive. The other big players may bet that Foster’s will drown in its own Shiraz.

Wine is in growth mode; beer is not. That was the news from a story this week that showed beer sales in America declining while wine is growing.

Further confirmation of this trend comes from down under. Foster’s has announced that it has acquired a 19% stake in Southcorp through its purchase of the Oatley family’s stake in the company. The Oatleys sold their Rosemount winery to Southcorp a few years ago but the company, under their management for a time, has struggled.

Foster’s wine holdings in America, Beringer Blass, hasn’t exactly been setting the world on fire since they acquired it two years ago for $1.14 billion (A$2.5 bln). Although the group has attractive properties, growth has been below expectations and with the dollar’s decline against the Aussie dollar, the asset has not been a good performer. Shareholder appetite for growth through acquisitions has since waned.

Does misery love company? Apparently so. But if Foster’s follows through on this initial stake with an outright purchase of Southcorp, which is not certain with some analysts even expecting a bidding war, then the combined company would be the number one Australian producer and have a strong presence in the growing North American wine market. So they are essentially “doubling down” by taking a stake in another troubled wine maker, a high risk move, but chances are that they will execute this acquisition better through larger market power. The barrel always turns…

And the Americans sure do love that Shiraz and Chardonnay.

In a further sign of consolidation in the wine industry, the ailing Australian producer Southcorp may accept a takeover from the Australian wine and beer group, Foster’s. Southcorp’s brands include Penfold’s, Rosemount, Lindeman’s and Wynn’s. Shares of both companies have halted pending news.