Paul McIntyre: Too early for Foster's to raise celebratory glass

Australians have long revelled in their ability to absorb alcohol and now one of their best-known global beer brands, Foster's (the lager no Australian actually drinks), is squaring up to become the world's largest premium wine producer.

The scenario is far from guaranteed, but if Foster's Brewing Group is prepared to sweeten its bid price for Australian wine producer Southcorp in coming weeks, sales from the new entity will top those of the world's biggest wine operation, housed within the US-based Constellation Brands.

This week, Foster's formally laid out its audacious takeover plans to acquire Southcorp, after taking the decisive step of securing an 18.8 per cent stake in the wine producer through the buy-out of the Oatley family stake for A$584 million ($628 million). Now Foster's wants to gobble up the rest of the company after steering clear of risky acquisitions for a number of years.

If successful, Foster's would no longer be known as a beer company with a few wine assets - it would lift the company to number one in market share in several categories for bottled wine in the US, Britain and Australia.

Foster's trumpeted the offer by saying that gaining control of the Rosemount, Penfolds and Lindemans brands from Southcorp would create a "Brand Australia" by folding its targets into its own wine operations, some of which have fared badly in markets such as the US.

Southcorp is seen as a premium asset by international beverage companies and the bid by Foster's has sparked speculation that a rival offer may soon surface. Foster's A$4.17 a share bid has already been overtaken by investors punting on a higher offer from Europe or the US, with French player Pernod Ricard, owner of Orlando Wyndham and the Jacobs Creek label, rated as a possible suitor for Southcorps assets.

Foster's painful experience with its US-based wine group Berenger has forced the company to stay focused on pruning costs and boosting efficiencies in the past few years. It was only the desire of the Oatley family to dump its stake in Southcorp that forced Foster's to get back on the acquisition trail and cancel its own plans for a share buy-back.

It's likely Foster's was forced to move on Southcorp for fear that one of its global competitors, such as Constellation, Allied Domecq or Diageo, would.

But Foster's bid for Southcorp has already been labelled by some investment banks as a move likely to destroy shareholder value. Analysts believe the integration costs are too significant for Foster's to generate a decent return on the A$3.1 billion price tag. Foster's will also assume A$500 million of Southcorp debt, boosting the total value of the bid to A$3.6 billion.

Southcorp has struggled in recent years after suffering from a disastrous discounting strategy which culminated in A$800 million in write-downs in 2003 and the departure of the chief executive responsible for the move. Last year, it turned a thin profit of A$46 million after new boss John Ballard started his turnaround effort.

Before taking on the risky Southcorp chief executive's role, Ballard held several company directorships, including Woolworths, and was blissfully commuting between his Sydney harbourfront pad and his Kangaroo Valley farm two hours south of Sydney. Life has certainly changed for Ballard, although there has been some progress with his new gig.

Southcorp's share price has recovered from the A$3 mark last year and the run-up in its stock price through 2004 is a sure sign that the move by Foster's was not a surprise. Still, Southcorp has labelled the Foster's bid cheap and opportunistic, which is why chief executive Trevor O'Hoy has been trying to woo institutional investors this week on the merits of the bid. Foster's has yet to convince the market it has the skills to integrate the two operations, which would have combined annual sales of A$6.9 billion and more than 50 wine brands and 40 types of beer.

Plans by Foster's to take the knife to Southcorp's operations were disclosed in its bidder's statement this week. They could see the closure of production facilities in the Hunter Valley, Coonawarra and McLaren Vale, including the Rosemount winery established by the Oatley family. The combined operations would have 16 wineries, but Foster's is expected to generate savings by shutting production facilities and moving labels to its larger vineyards.

At this stage, though, there's a long, long way to go before any corks are popped in celebration.