Wine proves a lasting headache for Foster's

MELBOURNE (Reuters) - Every drinker knows mixing beer and wine is a bad idea, something Australian brewer Foster's Group (FGL.AX) has discovered as it grapples with its under-performing wine division.

Foster's has signaled its wine business, the world's second-largest, is up for sale, but finding a buyer might be difficult unless it is prepared to entertain piecemeal offers for its various Australian and Californian brands such as Penfolds and Beringer.

Foster's shares have tumbled 17 percent since it announced a review of its wine business last month, and the resignation of chief executive Trevor O'Hoy, after rising 3 percent on the news.

Separating Foster's beer and wine assets will increase the value of the company to as much as $14.5 billion, analysts believe, compared with a current market capitalization of around $8.5 billion, but finding someone to take on the whole wine operation is the problem.

"I'm sure some big players are interested. The biggest question mark is whether they would be interested in the whole portfolio or whether they would start cherry-picking in terms of brands or regions, or wineries or vineyards," said Fortis Investment Partners portfolio manager Theo Maas.

Foster's owns Beringer Wine Estate in California, which it bought for A$2.9 billion in 2000, and the Southcorp brands in Australia including Penfolds and Rosemount, for which it paid a hefty A$3.7 billion in 2005. Analysts value the business at up to A$5 billion ($4.8 billion) now.

It has been hit by the U.S. economic slump and a drift away from Australian wines as the strong Aussie dollar makes them more expensive relative to other New World wines.

Deeper-rooted problems include a plethora of brands that successive management teams have failed to sort out, while the strong currency has made Foster's domestic wine assets more expensive for potential international buyers.

Industry figures show slumping domestic sales and exports, and the share price is languishing at late 2004 levels.

"I'm not sure whether Foster's would be happy with the price they would get for wine, or whether they could flog the whole thing," said Maas.

One solution for Foster's may be to reduce its exposure by selling individual brands or selling vineyards, which Credit Suisse values at some A$1.5 billion for Beringer's Napa, Sonoma and North Coast vineyards and about A$500 million for premium Australian vineyards.

Another possible outcome of Foster's internal review, to be completed this year, may be a separate listing of the wine and beer businesses, which would require disentangling an integrated sales team.

But such a move could eventually put the beer assets in play.

"The wine business is a poison pill. Nobody is going to want to swallow the company until that business is flicked, because wine will become your headache," said Kristan Walker, an analyst at Deutsche Bank, who used to work at Southcorp.

ALL OPTIONS CONSIDERED

A Foster's spokesman said while all options were on the table, turning wine around was the first priority.

"This stage of the wine cycle is a tough one for everybody," he told Reuters. He declined to comment on whether any unsolicited bids had been received.

Among those touted as most likely buyers of some of Foster's assets are British alcoholic drinks giant Diageo Plc (DGE.L) and France's Pernod Ricard (PERP.PA), who declined to comment, and Constellation Brands Inc (STZ.N).

Diageo, with wine interests in California including its Sterling and Beaulieu brands, might be interested in Beringer but generally prefers the higher returns it can make on spirits and beer. Pernod, which owns Jacob's Creek in Australia, has had trouble pushing through higher prices and is busy with its acquisition of Absolut vodka.

Constellation Brands, owner of the historic Hardy's label in Australia, wrote down its Australian and UK wine operations by $820 million in April, citing pricing pressures and a recent Australian wine glut, and sold some Californian brands.

"Our focus is on hunkering down and paying down debt," Constellation Brands Chief Executive Rob Sands said on July 1 when asked if he was interested in Beringer.

Deutsche Bank's Walker said global brewers including SAB Miller (SAB.L) or Heineken (HEIN.AS) would be interested in Foster's beer business, which holds a 50 percent market share in a duopoly (competing with Lion Nathan LNN.AX) and offers high margins of more than 30 percent, compared with about 25 percent in the United States.

SAB Miller already has a taste of the Australian beer market through its Pacific Beverages joint venture with soft drinks firm Coca-Cola Amatil Ltd (CCL.AX), but Amatil this week ruled itself out as a buyer of Foster's beer or wine business.

Others say Australia is a mature market, which makes it less attractive than faster-growing regions.

"With Australia accounting for less than 1 percent of global beer volumes, and showing no growth, we expect it is well down the list of targets for international brewers," Macquarie Equities analysts told clients.

($1=A$1.04)

(Editing by Lincoln Feast)