Foster's takes slice of Southcorp

MELBOURNE - Foster's Group, Australia's biggest brewer and winemaker, has bought an 18.8 per cent stake in wine company Southcorp, prompting speculation it plans a A$3.1 billion ($3.4 billion) bid to gain control of top-selling brands such as Penfolds and Rosemount.

Foster's paid A$583 million, or A$4.17 a share, for the Oatley family's stake to become the biggest shareholder in Southcorp.

Melbourne-based Foster's said that it planned to make a "major announcement".

Buying Southcorp, whose Penfolds Grange is Australia's most expensive wine, would make Foster's the biggest owner of vineyards in the world with 12,000ha.

The stake may let Foster's chief executive, Trevor O'Hoy, block any bid by Allied Domecq or Diageo, which are expanding through acquisitions.

"Strategically it's a great fit and Foster's can do a lot with the business and brands," said Rupert Clifton-Bligh, of Berren Asset Management.

"You can't just go out and create a brand like Penfolds, with its history and market presence; you end up buying it and it's not going to come cheap."

Wine companies have been making acquisitions to secure brands and vineyards as a glut in California that has depressed retail wine prices eases.

The deal is a change in strategy for O'Hoy, who had pledged to focus on improving profit at the wine business, where earnings fell 32 per cent in the year ended June 30.

Foster's took A$178 million in charges against its Beringer Blass unit in the second half.

"People will be scratching their heads over this one," said Shawn Burns of Deutsche Asset Management. Foster's had done a "back flip".

Jason Teh of Investor's Mutual said he was concerned that Foster's could pay too much for Southcorp.

"The share price already has factored in a takeover premium, therefore Foster's have to pay more," he said.

Foster's, which brews Australia's top-selling Victoria Bitter beer, created a global wine business in 2000 by paying $1.5 billion for Napa Valley-based Beringer Wine Estate Holdings and merging it with its Australian Mildara Blass unit.

Buying Southcorp would boost Foster's annual wine revenue to A$2.7 billion and increase its share of the United Kingdom market, the country's top export destination. Australia is the world's biggest wine exporter outside Europe.

The Oatley family have been Southcorp's biggest shareholder since 2001, when they merged their Rosemount Estates with the company.

Bob Oatley had resigned as Southcorp's deputy chairman, the company said yesterday.

- BLOOMBERG