Brewer's wine bid seen as 'mistake'

SYDNEY - Brewer Foster's was making a "mistake" by bidding A$3.1 billion ($3.37 billion) for Southcorp because it was paying too much for a company recovering from a record loss, brokers said yesterday.

Merrill Lynch analyst David Errington said Foster's A$4.17 a share offer for Southcorp was "a poor decision" and the takeover bid was not in the best interests of shareholders. Errington cut his rating on Foster's to "neutral" from "buy."

Southcorp is closing wineries to reduce costs after a failed discounting strategy and writedowns from its acquisition of Rosemount led to a A$923 million loss in 2003.

Foster's chief executive Trevor O'Hoy is midway through a one-year plan to restore earnings growth at his Beringer Blass Wine unit, after a grape glut in California depressed prices and cut earnings.

Hugh Giddy, of Perennial Value Management, said: "This is Foster's repeating mistakes from all sides, such as when Southcorp acquired Rosemount and Foster's bought Beringer.

"Not only are they paying a full price, there is a chance they will have to pay more."

Yesterday, Southcorp rejected the Foster's bid as too low and described it as possibly an opening bid.

Foster's chief financial officer, Pete Scott, said the company, which paid US$1.5 billion ($2.15 billion) in 2000 for California-based Beringer, bought that business at the "peak" of prices for wine assets. That would not be the case with Southcorp.

The acquisition would give Foster's top-selling wines such as Penfolds and Lindemans, and create the world's biggest seller of premium wines.

Its products would range from Penfold's Grange, Australia's most expensive wine, to Victora Bitter, the nation's top-selling beer.

Foster's would assume about A$500 million of Southcorp's debt, valuing the total acquisition at A$3.6 billion.

The bid values Southcorp at 14.9 times forecast earnings before interest, tax, depreciation and amortisation for this year, compared with the 12 times earnings Foster's paid for Beringer and the 12.3 times earnings New York-based Constellation Brands, the world's biggest winemaker, paid for Adelaide-based BRL Hardy in 2003.

Dawn Oldham, an analyst at Smith Barney, said the acquisition of Lindemans and Penfolds could "cannibalise" Foster's sales of Wolf Blass and Jamieson's Run wines, which sell for about the same price.

"The deal makes sense strategically but there is the risk of indigestion," she said.

"There is some reason to give Foster's the benefit of the doubt but Southcorp is a significant business to digest."

Lucinda Chan, head of Asian business at Macquarie Equities, said the strategic value of Southcorp overall could offset the "relatively high" price quite considerably.

"This is quite an irreplaceable position to be in the world wine market with icon brands and premium vineyards."

- BLOOMBERG