Foster´s CEO throws in the towel
Anyone volunteering to break up Foster´s wine and beer business? Amid all the razzmatazz surrounding the InBev takeover attempt of Anheuser-Busch, the resignation of Foster´s CEO Trevor O´Hoy at the beginning of June has almost gone unnoticed.
On 10 June 2008 Foster´s Group Ltd chief executive Trevor O´Hoy, 53, resigned as the company announced an earnings downgrade and writedowns, admitting it had paid too much for its wine assets.
Mr O´Hoy who has been with the company for 33 years spent the past four years at its helm. Since then, everything outside his control that could go wrong, has. An international wine glut, grape overproduction in Australia, and a rapid rise in the Australian dollar have crimped Foster´s revenue.
Things under his control haven´t fared much better. Key executives have quit, integration of the beer and wine businesses has been more painful than anticipated and the big cost savings have failed to materialise.
For years, Mr O´Hoy has been under flak from analysts for allegedly having paid too much for Foster´s foray into wine. However, most of his critics prefer to forget that Foster´s strategy for let´s say the past 16 years has always been termed “survival”.
As an independent beer company Foster´s had no chance. Therefore it took it.
Sorry for the blatant paradoxical statement. But some of you will remember that in 1992 Foster´s was lying on the ground bleeding following the disaster of going international in the 1980s. Ted Kunkel, Mr O´Hoy´s predecessor, picked up the pieces, turned the brewer around and by 1999 had to make a decision. By then Foster´s was ranked 17th or 18th among the world´s brewers. The capital it had access to would not be enough for Foster´s to buy itself a rank among the top 5 global brewers. What could it do? Well, the bankers advised Foster´s to buy into wine. Because in the wine business it could still rise to the top with a few clever acquisitions. Foster´s bought into wine in 1996 with the AUD 500 million purchase of Australia´s Mildara Blass and then made a big bet in August 2000 with the AUD 2.9 billion purchase of Beringer Wine Estates in California. That catapulted Foster´s to number two position in the global wine company ranking.
As media commentators say, Beringer in particular was a disaster. It underperformed its U.S. peers. Having splashed about AUD 3 billion in capital over five years on this business, Foster´s is staring at a paltry return this year of barely USD 200 million, according to estimates by investment bankers Merrill Lynch.
In retrospect you could blame the Beringer acquisition on Mr Kunkel. But Mr O´Hoy has to accept the blame for the AUD 3.2 billion acquisition of Australia´s largest wine company Southcorp announced in early 2005. Many analysts already believed then that the sellers of wine assets were getting a much better deal than the buyers.
“Foster´s has made a poor decision,” said Merrill Lynch analyst David Errington in a research note dated 18 January 2008, which was quoted widely.
Indeed, Mr O´Hoy had told shareholders just two months before the Southcorp bid that he envisaged only organic growth in the 12 months ahead as he worked on improving returns at Beringer Blass.
But his hand was forced by the decision of Southcorp´s biggest shareholder, the Oatley family, to cut their losses and take the first opportunity to sell the stake they had inherited when they sold Rosemount to Southcorp. Mr O´Hoy felt he had to move, at least to keep the big international rivals out of his home market.
Mr O´Hoy knew that he was driven by the powers that finally proved his downfall. In order to generate some returns for his shareholders he gradually sold off the family silver: Foster´s real estate business, its gaming division and most famously, the rights to the Foster´s brand name in certain geographies to Scottish & Newcastle. Following the breakup of Scottish & Newcastle, these rights now belong to Heineken.
Before the release of its 2008 full year results Foster´s admitted that it would have to write down (or off) AUD 600 million to AUD 700 million in assets on these two wine acquisitions. That´s ten percent of their takeover value.
Observers pointed out that there will be much more to come, although it is on the cards that some kind of restructure or spin-off could see Foster´s move ahead from here.
The admission by Foster´s chairman David Crawford that the company´s wine acquisitions had failed is a timely reminder that most big acquisitions do not work for shareholders. Yet, they always work for bankers and lawyers and other fee-takers and that´s the reason why they love them.
In Foster´s case, it has been estimated that it paid AUD 300 million in fees for acquiring Beringer and Southcorp. That´s 5 percent of the takeover price. Now work out for yourselves on the back of an envelope how much money in fees alone InBev will pay for its takeover of Anheuser-Busch and the figure – USD 2.3 billion or so – will make your head spin.
Mr O´Hoy lost the confidence of institutional investors last year when it became painfully clear that his multi-beverage strategy had failed. The thinking behind this was, broadly, that if you had more beverages in your portfolio you would build more market power with distributors and could therefore charge more for your product. Unfortunately, Mr O´Hoy made the near fatal mistake of discounting some of Southcorp´s famous flagship brands and tore up earnings for a time, particularly in Britain.
Moreover, in Australia, his integrated beverage company was up against the formidable market might of the duopolist retailers Coles and Woolworth´s, which have moved into pubs and bottle shops en masse. Naturally their buyers thought they deserved a discount for buying extra product and besides, wine and beer are vastly different products.
Although Foster´s has had to face a number of problems, it´s number one problem is that it paid too much for the wine businesses in the first place: in the order of AUD 7 billion for assets which, on Merrill´s numbers, are generating a mere AUD 450 million in EBIT.
Because of the disappointing returns, Melbourne-based Foster´s began a review of its wine operations in April that will be overseen by the chairman. The review may ultimately lead to a break-up of the beer and wine businesses and both businesses being sold. Already journalists have been speculating that Foster´s Australian beer business, one of the most profitable beer businesses in the world still, could become an ideal takeover target for Heineken or SABMiller.
For many of Foster´s employees the eventual demise of this company isn´t exactly a reason for great joy. And only a cynic would argue that “hey, didn´t Foster´s manage to put off the inevitable for 16 years?”
The board said it had accepted the resignation of Mr O´Hoy. Mr O´Hoy has agreed to stay on until the appointment of his successor. "The board will now begin a rigorous international search to identify a successor," it was announced. Well, good luck.
On 27 June 2008 the deputy CEO of National Australia Bank (NAB) Michael Ullmer was appointed a Director at Foster´s. A former Chief Financial Officer at NAB and the Commonwealth Bank with 30 years of experience, Mr Ullmer is expected to succeed Graeme McGregor as head of the audit committee when Mr McGregor retires.
