Foster's May Be $11 Billion Target After Wine Spinoff

Foster’s Group Ltd.’s plan to spin off its wine unit may prompt bids from SABMiller Plc, Asahi Breweries Ltd. and other global beermakers attracted to the wider profit margins in Australia, fund managers said.

The brewing business may be worth more than A$13.5 billion ($11 billion) and draw interest from Suntory Holdings Ltd. and Sapporo Holdings Ltd. of Japan, said Theo Maas, who helps manage A$5 billion at Arnhem Investment Management in Sydney. The brewer of Foster’s Lager and Victoria Bitter, Australia’s top- selling brand, controls about 50 percent of the local market.

Foster’s Chief Executive Officer Ian Johnston, 62, unveiled the plans yesterday, unwinding a A$6.8 billion wine expansion marred by falling prices and declining profitability. SABMiller will begin brewing in Australia this year through a venture with Coca-Cola Amatil Ltd., taking on Foster’s and second-ranked Lion Nathan, who together control more than 90 percent of the market.

“I wouldn’t be surprised to see Coca-Cola Amatil and SAB bid for the beer business,” said Rhett Kessler, who helps manage about $1.1 billion at Pengana Capital Ltd. in Sydney and doesn’t hold Foster’s shares.

Sally Loane, a spokeswoman for Sydney-based Coca-Cola Amatil, Australia’s largest soft-drink maker, declined to comment in an e-mail. Suntory spokeswoman Aya Takemoto said, “we haven’t heard anything about it.”

Photographer: Nelson Ching/Bloomberg

Cans of Snow beer, a brand by SABMiller, sit on a shelf at a grocery store in Beijing. Close

Cans of Snow beer, a brand by SABMiller, sit on a shelf at a grocery store in Beijing.

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Photographer: Nelson Ching/Bloomberg

Cans of Snow beer, a brand by SABMiller, sit on a shelf at a grocery store in Beijing.

Molson Coors ‘Interested’

Molson Coors Brewing Co. Chairman Peter Coors said it’s too early to speculate whether the Foster’s move makes it more attractive. “Obviously we’re interested because we’ve got a stake in it,” he said today. “We’re just going to wait and see what happens and where it’s valued.”

Molson Coors holds about 5 percent in Foster’s through an arrangement with Deutsche Bank AG.

Foster’s shares rose 0.2 percent to close at A$5.54 in Sydney trading, giving it a market value of A$10.7 billion. The stock rose 7.4 percent yesterday.

Sapporo spokesman Katsuhito Ogawa and Asahi spokesman Takayuki Tanaka declined to comment. Asahi may buy alcohol and food companies in the Asia-Pacific region, President Naoki Izumiya said last month.

SABMiller is weighing a possible bid for Foster’s after holding “early-stage” talks with its advisers, the Daily Telegraph reported, without saying where it got the information. SABMiller spokesman Nigel Fairbrass had yesterday declined to comment on whether it’s interested in acquiring Foster’s or its beer business.

Foster’s hasn’t received takeover offers, Johnston said yesterday.

Asahi, Suntory Acquisitions

Asahi and Suntory have acquired Australasian drink businesses in the past two years.

Suntory agreed to buy Groupe Danone SA’s Frucor unit for more than 600 million euros ($732 million) in October 2008. Two months later, Asahi said it would acquire Cadbury Plc’s Schweppes soft-drink business in Australia for 550 million pounds ($792 million).

Japan’s Kirin Holdings Co. last year paid A$3.5 billion for the 54 percent of Lion Nathan it didn’t already own in a bid worth 12.5 times forecast earnings. Foster’s yesterday forecast annual earnings before interest, tax and items of as much as A$1.08 billion.

“If you put the Lion Nathan multiple on the Foster’s beer business you get a price above A$7 a share,” said Maas, who owns Foster’s and Coca-Cola Amatil stock.

Major Hurdle

The CUB brewing unit generates 85 percent of Foster’s earnings and has a 38.5 percent profit margin.

Anheuser-Busch Inbev NV, the world’s largest brewer, has a margin of 27.9 percent, Heineken NV’s is 12.4 percent and Asahi’s is 5.6 percent, according to data compiled by Bloomberg.

“Although Foster’s has been subject to takeover speculation for the past number of years, the major hurdle has been a ‘solve for the wine business’,” Greg Dring, an analyst at Macquarie Group Ltd., said in a note to clients today. “A full demerger of the two businesses is expected to be the solution many have been looking for.”

CUB may be worth A$12.5 billion alone, David Errington, an analyst at Bank of America Merrill Lynch, said in a note to clients. Its Foster’s Lager is sold in more than 150 countries.

Coca-Cola Amatil and SABMiller “are number one on my list and they are in a position to take one of the duopolists out,” Maas said. “The beer business as a standalone business is not going to remain independent for very long.”

Beer Consumption

Australians drink an average of 85.1 liters (22.5 gallons) annually, ranking them 12th globally, ahead of Spain, according to 2008 data from Kirin. The Czech Republic topped the table at 149.9 liters and the U.S. was 16th with 82.3 liters.

The Foster’s wine business, producer of Wolf Blass and Beringer, is the world’s second largest, behind New York-based Constellation Brands Inc.

Foster’s paid A$482 million for Mildara Blass Ltd. in 1996. It moved into California with the A$2.6 billion purchase of Beringer Wine Estates Holdings Inc. in 2001, before paying A$3.2 billion in 2005 for Southcorp Ltd., the largest maker of Australian wine.

The Southcorp purchase was led by then CEO Trevor O’Hoy, who resigned in July 2008. Johnston, who was Australia’s youngest Olympian, came out of retirement to take on the role.

The company’s stock has had two annual gains since 2001 and was 2.1 percent lower than when it bought Southcorp at yesterday’s close.

Foster’s yesterday announced pretax charges worth as much as A$1.3 billion against the wine unit, the biggest in three straight years of writing down the business.

Angus McKay, Foster’s chief financial officer, yesterday said the wine business will have assets worth about A$3 billion.

The “long awaited” split “potentially makes the two businesses strategically more appealing,” Morgan Stanley analyst Martin Yule said in a note to clients.

Foster’s hired Gresham Advisory Partners to assist on the plan, Johnston said. The company has yet to make a decision on management, final structure or debt holdings and no split is likely before 2011, he said.

To contact the reporter on this story: Robert Fenner in Melbourne rfenner@bloomberg.net.

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