Foster’s could be split up
In a move aimed at pacifying disgruntled investors, who think that the company would be better off splitting the beer operation from the wine division than pursuing its flawed multi-beverage strategy, Foster’s CEO Trevor O’Hoy, for the first time, admitted that such an option was worthwhile pondering.
Foster’s share price underperformance has raised market speculation that Foster’s may consider splitting the company into separate wine and beer businesses. According to the Australian media, Foster’s Chief Executive Trevor O’Hoy said in June that a break up of the company was not under consideration now, but could be an option in a few years’ time. Before any such split occurred, Mr O’Hoy would likely prefer to see the wine division increase profitability. He also reportedly said that the Foster’s Group will steer clear of any small bolt-on acquisitions until it lifts the performance of its wine division and that the prospect of any large purchases was completely off the agenda.
As Foster’s enters a new financial year, Mr O’Hoy is no doubt looking forward to a smoother twelve months for the company. With a possible recovery in the Australian wine industry, the coming year should certainly be an improvement on the last.
The multi-beverage strategy, despite all the florid talk of strategy, was but a cost-saving scheme, involving a combined sales force selling both wine and beer. Analysts report that while the approach worked for the most part, the scheme met resistance from a number of wine retailers and restaurants, who preferred to deal with wine specialists.
As a result, first-half wine sales suffered. Foster’s management were quick to address the issue and re-instated a dedicated wine team. Following the move, according to management, the multi-beverage strategy is now largely working and sales have improved in the second half.
However, before Trevor O’Hoy could lean back and relax a bit, the beverage group was presented with an AUD 850.7 million claim from the Tax Office stemming from the company’s attempted rescue of its Elders Finance subsidiary in the late 1980s and 1990s.
Elders Finance, a subsidiary of Elders IXL, was one of the biggest investment banks in Australia during the 1980s stock market boom. But in the aftermath of the 1987 stock market crash, the value of most of its investments plummeted.
Foster’s, which became the renamed Elders IXL in the early 1990s, said it had been notified that the claim would include a “primary tax” bill of AUD 548.7 million and penalties and interest of AUD 302 million, which related to the tax deductions the company claimed on the hundreds of millions it poured into its former Elders Finance subsidiary.
Media reports say that the latest Tax Office assessment is a dramatic increase on last September when Foster’s said the primary tax exposure from the same claim would be about AUD 379 million. For the record, the figure was AUD 237 million in May last year.
Obviously, Foster’s intends to object to the assessments. However, the company said it still expected to pay AUD 257 million to the Tax Office by 3 August 2007.
