Wine proves a lasting headache for Foster's

By Victoria Thieberger - Analysis

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