The odds of a takeover battle for Foster’s Group before it presses the button on a demerger of its wine and beer business have significantly shortened after a private equity firm bid as much as $2.7 billion for the wine division to kick off what could be a heated auction for the beverage assets.
Foster's shares soared on the approach, rising as much as 6.1 per cent this morning. They closed up 27 cents, or 4.5 per cent, at $6.34 - their highest close since January 2008. The stock is up 15 per cent for the year, compared with a 7 per cent decline for the overall market.
"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."
The bid has caught directors at an unfortunate time as the entire Foster’s board is currently travelling through Europe on an operational review and roadshow.
It was long believed Foster’s brewing arm would be the first to attract a takeover bid, with international players such as SABMiller and Asahi nominated as leading candidates to buy the business which sells some of the most popular beers in Australia such as VB, Carlton Draught and Corona.
But today it was revealed that its wine division, recently renamed and rebranded Treasury Wine Estates, had flushed out a willing buyer. The embattled wine business is the weaker of the two Foster’s divisions and has been hit with writedowns of more than $2.5 billion including $1.3 billion in impairments at the company’s full-year results last month.
Foster’s this morning released a brief statement to the market advising it had received an unsolicited expression of interest for Treasury Wine Estates from an international private equity firm.
The statement said the indicative, non-binding proposal involved a cash consideration of between $2.3 billion and $2.7 billion for 100 per cent of the assets.
Foster’s said that after considering the value range in the proposal, the board continued to consider that a separation of the wine business from the beer business through a demerger was most likely to represent the best outcome for all Foster’s shareholders.
In addition, the statement said, the high level of conditionality, the requirement for exclusivity and other terms of the proposal are considered to reduce the value and certainty of the proposal.
‘‘The board of Foster’s believes that Treasury Wine Estates is well positioned to grow over the coming years and thereby create additional value for Foster’s shareholders. The board considers the indicative proposed value range, referred to above, significantly undervalues Treasury Wine Estates and its future prospects.
‘‘Foster’s remains committed to the evaluation of issues, costs and benefits of a potential demerger, with work continuing to progress to schedule. However, the board will continue to consider any proposal that is in the best interests of shareholders.’’
If the company had agreed to the sale, it would have been the largest buyout by a private equity firm in the Australian market since 2007.
Analysts have valued Foster's wine business at $1.7 billion to $3.5 billion.
"It seems like a nice little opening bid here, it is definitely going to speed up the process (of a sale)," said Arnhem Investment partner Theo Maas. "But in terms of the value, it is lower than the book value. We are at the low point in the cycle and looking at very depressed earnings levels."
A Foster’s spokesman declined to identify the private equity firm behind the expression of interest because the proposal had been made confidentially.
In August, Foster’s reported a net loss of $464.4 million for 2009/10, compared to a net profit of $438.3 million in the prior year.
The result included a previously-flagged non-cash impairment of $1.16 billion against the carrying value of the group’s wine assets.
Foster’s sold less beer and wine by volume as consumer sentiment in the beer market softened and market conditions in the wine sector were mixed.
Foster’s said market conditions in the wine business remained mixed, with oversupply in the Australian market, a subdued consumer environment in key international markets, and the strength of the Australian dollar expected to continue to affect the business.
Earnings from Treasury Wine Estates fell 27.2 per cent to $221.3 million, with unfavourable exchange rates having a major impact.
On a constant currency basis, earnings rose 20.5 per cent, with earnings more than doubling in the second half.
Wine volumes dipped in Australia and New Zealand as the company exited the cask wine sector and dumped 37 ‘‘tail’’ brands.
Foster’s said it remained committed to the evaluation of issues, costs and benefits of a potential demerger, with work progressing to schedule.
‘‘However, the board will continue to consider any proposal that is in the best interests of shareholders,’’ Foster’s said.
The company spent over $6 billion building its wine business, the world's second largest, with its acquisitions of California's Beringer Wine Estates in 2000 and Australia's Southcorp in 2006. Foster's has hired Gresham Advisory Partners to advise on the demerger.
egreenblat@theage.com.au
With AAP, Reuters
