So adieu then, Foster’s Group
The Foster’s Group Ltd., Australia’s biggest liquor maker, plans to spin off its wine unit, unwinding an AUD 6.8 billion (EUR 4.7 billion) expansion marred by falling prices and shrinking profit margins.
Foster’s CEO Ian Johnston is betting separate companies will be more appealing to investors. The brewing unit, with Australia’s top-selling brand Victoria Bitter, generates 85 percent of earnings and is more profitable than AB-InBev and Heineken.
Currently, Foster’s has a market value of AUD 10.5 billion (EUR 7.2 billion). The CUB beer unit may be worth AUD 12.5 billion (EUR 8.6 billion) alone, David Errington, an analyst at Bank of America Merrill Lynch, said. That’s assuming that the beer unit will take on all the AUD 2 billion in debt. Mr Errington thinks Foster’s beer unit is worth 17 times net profit. Wine could be worth as much as AUD 2.1 billion (EUR 1.4 billion), considering that it will be debt free with AUD 200 million a year in free cash flow and about AUD 300 million in EBITDA, which, based on a 15 times multiple, gives you the AUD 2.1 billion valuation.
Foster’s expects EBIT of between AUD 1.05 billion to AUD 1.08 billion for the year ending June 2010, excluding the impact of a new AUD 1.1 billion to AUD 1.4 billion write-down. These charges follow AUD 397.6 million in write-downs Foster’s took in 2009 to sell vineyards and scrap brands and AUD 602.9 million in one-time items in 2008.
Foster’s began expanding into wine 15 years ago when it paid AUD 482 million for Mildara Blass Ltd. in 1996. It moved into California with the AUD 2.6 billion purchase of Beringer Wine Estates Holdings Inc. in 2001, before adding Australia’s wine company Southcorp in 2005 for AUD 3.7 billion.
If Foster’s is to be split up now, it should not be seen as an admission that its multi-beverage strategy has failed. Rather its wine business has suffered as a consequence of its export dependency. The wine unit gets about 30 percent of its sales from overseas. Unfortunately the strong Australian dollar has slashed the value of overseas sales. Each 1 cent move in the Australian dollar against its U.S. counterpart affects Foster’s EBIT by AUD 1.9 million (EUR 1.3 million).
Add to that a grape glut in Australia which has prompted discounting and the U.S. recession which has curbed restaurant demand, and you begin to understand why the wine unit has suffered in recent years. It posted a profit of AUD 99.2 million in the six months ended December 2009, 41 percent less than it earned from the unit before buying Southcorp, it was reported.
Mr Johnston said that he has not received an offer for the whole group. Guess why? Every buyer with some sense will leave it to Foster’s to do the dirty work and spin off the wine business before they grab the beer business. Foster’s Australian beer unit CUB is one of the world’s most profitable brewing companies. CUB posted a 38.5 percent first-half profit margin (EBIT). AB-InBev, the world’s largest brewer, has an EBIT margin of 27.9 percent while Heineken’s is 12.4 percent.
A separate beer unit may attract a takeover offer from Coca-Cola Amatil and SABMiller, who are building an Australian brewery together. Japanese brewers will also ponder making a move, as will Heineken. The Dutch brewer “inherited” the Foster’s brand (in perpetuity) in several markets outside Australia when it took over Scottish & Newcastle in 2008. Whether they will be able to make an AUD 10 billion offer while they are still integrating FEMSA and struggle under a high debt load – we shall see.
Foster’s yet has to make a decision on management, final structure and debt holdings of the entities. Likewise, no decision has been made on the timing of the demerger, which would depend upon “among other things, prevailing economic and capital market conditions”. Foster’s said it was unlikely to be implemented until the first half of calendar 2011 at the earliest.
