MELBOURNE Foster's Group Ltd FGL.AX, Australia's largest brewer, rejected a private equity offer worth up to $2.5 billion for its wine business as too cheap, sending its shares up as much as 6 percent on hopes of higher bids.
Investors were surprised by the approach for the world's second-largest wine business, which has cost Foster's billions of dollars in writeoffs and is now being split from the lucrative beer business.
It also raised speculation that suitors for the combined group, which has a market value of about $11 billion, might now step forward.
"This puts the whole company in play. If you are one of the big brewers, you probably didn't want to be saddled with a wine business you didn't understand or want," said Tom Elliott, managing director of hedge fund MM&E Capital.
"Now you know there are potential buyers out there, you can make a bid for the whole company knowing that you can offload the wine business to private equity or someone else," he said.
Investors have been focusing on potential buyers for the beer business, which enjoys some of the highest profit margins in the brewing world.
Late last month, sources said brewing groups SABMiller SAB.L and Japan's Asahi Breweries (2502.T) were looking at the company's beer operations, valued at more than $10 billion, but no firm bids have emerged.
The ailing wine business, with vineyards from California's Napa Valley to the Hunter Valley near Sydney, had been seen as the unwanted child and Foster's said on Wednesday it would continue to work on splitting the beer and wine units. It did not identify the private equity company that made the approach.
Sales of Foster's wine, including Beringer, Penfolds and Wolf Blass, have been hit by a deep U.S. recession and a trend away from low-end, bulk wines in Australia. The strong Aussie dollar has also been a drag, slashing the value of U.S. earnings.
Foster's shares closed up 4.5 percent at A$6.34 on volume almost four times its average over the past 30 days in a broader market down 0.8 percent.
The wine business, known as Treasury Wine Estates, is valued at A$3.1 billion on Foster's books, or about half what the company spent on wine acquisitions in a rapid expansion as it sought to offset flat demand for beer.
Foster's spent over A$6 billion building its wine business, which ranks behind Constellation Brands Inc (STZ.N), with its acquisitions of California's Beringer Wine Estates in 2000 and Australia's Southcorp in 2005.
Foster's has been overhauling the wine unit over the past year, selling unprofitable vineyards, changing U.S. distributors and focusing on higher-margin wines above $8 a bottle.
Analysts value the business at A$1.7 billion to A$3.5 billion.
Foster's was formed in the 1880s, when the first Foster's Lager was brewed -- becoming one of Australia's top brands -- and the Mildara Winery was established.
KEEN ON WINE
Foster's said the offer, worth A$2.3 billion-A$2.7 billion ($2.1 billion-$2.5 billion), was highly conditional and requested exclusivity, which it said reduced the value of the proposal.
The offer "significantly undervalues" the wine business and its future prospects.
A deal for the wine unit would have been the largest buyout by a private equity firm in the Australian market since 2007.
The major international private equity firms represented in Australia either declined to comment or did not return calls. They included Blackstone (BX.N), KKR (KKR.N), Carlyle CYL.UL, TPG TPG.UL and CVC CVC.UL.
Bain & Co in New York did not return calls seeking comment.
International private equity firms have shown renewed interest in cheap Australian assets this year, snapping up hospital owner Healthscope in July for A$2 billion.
Foster's spokesman Troy Hey declined to comment on the identity of the suitor, because the matter was confidential.
Banking sources said that TPG could be interested in buying back some of the assets it previously owned -- it owned about 55 percent of Beringer with some partners when it sold to Foster's for A$2.6 billion, including debt.
Beringer itself was established in California's Napa Valley in the 1870s.
Foster's said it is continuing with its plans to separately list its beer and wine businesses in 2011 but left the door open to other offers.
"The one positive side is (it shows) people could genuinely be interested in the wine business. At least that's encouraging," said Argo Chief Executive Jason Beddow, which owns Foster's shares.
Earnings from the wine business rose 21 percent to A$221 million for the year to June 2010, but a massive A$1.3 billion writedown on the wine assets, the third for the unit, marred the group's bottom line.
Foster's has hired Gresham Advisory Partners and Goldman Sachs to advise on the demerger.
(Editing by Balazs Koranyi, Dhara Ranasinghe and Lincoln Feast)