Foster’s cashes up but not for spin-off
In his widely circulated research note “Buy … It’s Time”, Mr Errington expressed his belief that Foster’s is now "heavily undervalued" because of tentative signs of a turnaround in the global wine industry and continued strong performance of its beer business.
"Foster’s beer business is expected to generate AUD 1 billion in EBIT [earnings before interest and tax] in the next year or two, meaning it would be easy to value beer at an enterprise value of AUD 12 billion – which is Foster’s current total [enterprise value]," he wrote.
"This implies that wine is valued at zero. And wine should generate around AUD 350 million of cash in [2008-09] despite dreadful market conditions."
Mr Errington’s last “buy”-recommendation on Foster’s was before its AUD 3.1 billion acquisition of the leading Australian wine maker Southcorp in 2005.
Hacks in Australia gleefully remember an incident at an analyst briefing when the Merrill Lynch analyst heavily criticised Foster’s foray into wine to the point that he was asked by Foster’s former chief executive Trevor O’Hoy to take a two-year holiday.
But Mr Errington never took the vacation and CEO O’Hoy resigned from the company in June 2008 – before the two year’s were up.
After Mr O’Hoy’s resignation, Foster’s chairman was quick to admit that the group’s experiment in transforming itself from a beer maker into a multi-beverage maker had been a costly mistake.
Earlier this year, following a review of the group’s wine business, Foster’s new chief executive Ian Johnston announced plans to structurally separate the wine and beer businesses.
This has fuelled speculation that the company could become a takeover target if Foster’s new management team fails.
However, critics tend to forget that the reason for Foster’s foray into wine was ultimately self-defence. Only by buying up wineries and wine brands could Foster’s turn itself such a hard one to swallow that predators would leave the brewer-cum-winemaker alone.
That strategy has worked well for Foster’s as a company – even though the financials did not quite work out.
The list of rumoured suitors for Foster’s beer business is long. It basically shows all the Japanese brewers and Coca-Cola Amatil.
Coca-Cola Amatil, which has been attempting to establish a position in Australia’s beer market with its joint venture partner SABMiller, has already denied the rumour.
