Merrill Lynch re-iterates “sell” on Foster’s

Ok, they have been saying it for years. So what’s new? Well, it seems like Foster’s management will not be able to turn a deaf ear on what the analysts have to say for much longer.

Speculation about the future of Foster’s multi-beverage operations has heightened since Merrill Lynch recommended in October that the group should separate its wine and beer businesses.

Merrill Lynch has had a "sell" recommendation on Foster’s since Foster’s took over the wine company Southcorp in 2005 – a deal which displeased the investment bankers.

Apparently, the bankers know how to make themselves heard. Their research note, which was distributed and hence quoted widely, reads that "investors need to recognise that it is very difficult to generate acceptable returns in wine.” Foster’s wine operations are facing significant headwinds, including rising costs and reduced grape production in Australia due to drought while a competitive edge has been eroded by a strong Australian dollar.

Merrill Lynch suggests a break-up of the group might be the best option to restore shareholder value.

"Our view is that Foster’s needs to break itself up to avoid further loss in shareholder value. And although the value of the break-up may not differ significantly from the current share price, it would prevent further capital being lost in the future", Merrill Lynch says.

The bankers reckon that the return on Foster’s investment in Southcorp is less than 2 percent before tax – that is an EBIT of around AUD 50 million on an investment of over AUD 3.5 billion. Not enough, apparently.

Interestingly, Merrill Lynch did not say who Foster’s should be selling its wine division to. Who, in their right mind, would be buying Australian wine assets these days if they face such condemning criticism?