Here we go again?

In January this year, Foster’s bought a large stake in the Australian wine company Southcorp, giving rise to rumours of a possible takeover. Foster’s acquired 18.8 percent of Southcorp, which owns the Penfolds, Lindemans and Rosemount brands, from the Oatley family for AUD4.17 per share. The Oatleys founded the Rosemount Estate brand and sold it to Southcorp in 2001 for USD762 million or 13.9 times EBIT.
Following the share deal with Foster’s, Robert Oatley and his son Sandy Oatley have both resigned from Southcorp’s board.
Southcorp employs 2,700 people and is the largest single investor in rural Australia according to its website. Its fortunes have been chequered in recent years due to the global glut in wine and the relatively high Australian dollar.1 billion (USD2.4 billion).

After two years in the red, Southcorp returned to profit in 2004. Its shares have risen in recent months probably on speculation that it could become a takeover target.
On 27 January Southcorp sent a letter to its shareholders calling Foster’s offer of AUD4.17 for all outstanding shares ‘opportunistic’ and ‘not reflecting the full strategic value of Southcorp.’ A bid at that price would value the company at AUD3.
It is believed that the fate of Southcorp will now effectively be decided by two financial institutions, Maple-Brown Abbot and Capital Group, which are said to together control about 20 percent of the winemaker.
The prospect of Foster’s going for a major acquisition has taken industry observers by surprise as until recently Foster’s has said that it was not going to expand through a big bid in the near future. Foster’s is sitting on a pile of cash after having sold its property business Lensworth for AUD846 million and its leisure and hospitality outfit ALH for AUD1.5 billion last year. However it had been widely expected that Foster’s would return the cash to its shareholders.
Foster’s president and CEO, Trevor O’Hoy was quoted as saying that the combination of Foster’s and Southcorp would command sales of over USD2.0 billion equating to around 39 million cases of wine annually. A combined company would put it in a league with Constellation Brands, which analysts expect to have sales above USD4 billion in its year through February 2005.
Consolidation in the wine industry is being driven by the U.S.-American Constellation Brands, a leading international producer and marketer of beverage alcohol brands with a broad portfolio across the wine, imported beer and spirits categories. Constellation Brands seized the top spot when it bought Australian wine firm BRL Hardy for just over USD1.0 billion in 2003. Since then it has paid USD1.0 billion for U.S. wine maker Robert Mondavi in December 2004. Constellation Brands is headquartered in Fairport New York and employs 8,000 people world-wide. It was founded in 1945 as Canandaigua Industries Company by Marvin Sands, whose goal was to sell bulk wine in barrels to bottlers in the eastern U.S. states. It went public in 1973 and changed its name to Constellation Brands in 2000 to better reflect the scope of the company and its broad range of over 185 products.
The acquisition of Southcorp would probably lift Foster’s from the second-largest premium wine business, by revenue, to number one – an outcome that O’Hoy claimed would be ‘transformational’ for Foster’s and the global wine industry.
Foster’s would become a global branded powerhouse. Yet, the acquisition of Southcorp would do much the same for its major internationals rivals.
Analysts have done their numbers and worked out that Constellation, Gallo and Pernod Ricard would all be number one by revenue if they acquired Southcorp. Allied Domecq would be joint number one, and Diageo, Vincor and Kendall would be marginally below the existing number one, Constellation.
This demonstrates that Southcorp has unique strategic value for the major global premium wine groups. In 2003, Constellation had a revenue of USD1.4 billion, followed by Foster’s (USD1.2 billion), Gallo (USD1 billion), Southcorp (USD800 million), Pernod Ricard (USD700.