Foster’s to Spin Off Wine Unit as Earnings Drop 12%

Foster's to Spin Off Wine Unit as Earnings Drop 12%
Carlton & United Breweries Managing Director John Pollaers standing for a photograph after Foster's Group's half-year results briefing in Melbourne. Photographer: Carla Gottgens/Bloomberg

Foster’s Group Ltd., Australia’s biggest brewer, will spin off the world’s second-largest wine business as it focuses on reviving beer earnings after first-half profit fell 12 percent.

Shareholders will vote on the split in April to receive one share in the new Treasury Wine Estates for every three Foster’s shares they currently own, the Melbourne-based company said today in a statement. Net income decreased to A$312.1 million ($313 million) in the six months ended December from A$355.7 million a year earlier, the Melbourne-based company said.

Foster’s is giving up on wine after a decade-long expansion marred by more than A$2.5 billion of writedowns as competition, a glut of grapes and a stronger Australian dollar hurt profitability at the maker of Penfolds, Lindemans and Beringer. The company, which rejected an offer worth as much as A$2.7 billion for Treasury in September, may attract takeover offers once the breakup is complete, analysts at Citigroup Inc. said.

“The split is the easiest way of making sure that each side is focused on their own business,” said Theo Maas, who helps manage about $5 billion at Arnhem Investment Management in Sydney. “We are looking at a complete new team on both sides of the business to take this forward.”

John Pollaers will become chief executive officer of the beer unit while David Dearie will lead Treasury after running its Australian operations. Current CEO Ian Johnston will leave the company.

Foster’s, whose brews include Victoria Bitter, was unchanged at A$5.74 at the 4:10 p.m. close of Sydney trading. The stock has risen 1.1 percent this year, compared with a 3.9 percent advance in the benchmark S&P/ASX 200 index.

Sales Decline

First-half sales fell 6.7 percent to A$2.2 billion. The company was expected to post first-half net income of A$353 million, according to the median estimate in a Bloomberg survey of six analysts. Sales were projected at A$2.2 billion, based on three estimates.

Carlton & United Breweries, the domestic beer unit, posted a 6.8 percent decline in earnings before interest and taxes to A$453.1 million after cooler summer weather damped demand.

Carlton & United’s profit margin, which measures earnings as a proportion of sales, narrowed to 37.8 percent from 38.5 percent a year earlier, the first decline in profitability since 2001.

Johnston, who will leave the company when the split takes effect, said on a conference call today that Foster’s has no intention of putting itself up for sale amid reports of potential bids. The Times and Sunday Times last year reported Foster’s may attract offers from international rivals such as SABMiller Plc and Asahi Breweries Ltd.

S&P Affirms Rating

The spinoff is likely to be completed in May, with Treasury to have about A$200 million of debt and A$60 million of cash. The rest of its liabilities will stay with the brewing business, which will result in Foster’s having “negative net assets” as the debt will be more than the value of its brands and goodwill.

Standard & Poor’s affirmed its BBB rating on Foster’s, the second-lowest investment grade, and said in a statement the split won’t have an impact on its credit assessment.

Pollaers, who has run the beer unit since April, has accelerated the rollout of new brews such as Fat Yak to offset declining sales of Victoria Bitter, the nation’s top-selling beer, with a goal of stabilizing Foster’s share of Australian sales at about 50 percent.

The company is battling competition from smaller rivals such as Lion Nathan, a unit of Tokyo-based Kirin Holdings Co. and Australia’s second-largest brewer, as well as a shift in consumer tastes to sweeter, pre-mixed drinks.

Wine Profit

“The demerger confirmation opens the door to M&A, yet the current macro and operational environment is not conducive to bids,” Citigroup analysts led by Andy Bowley said in a note to clients.

Wine profit from sales in Australia and New Zealand rose 7 percent to A$39.6 million. Profit from wine in North America and South America gained 24 percent to A$54.2 million while in Europe, the Middle East and Africa wine turned to a loss of A$500,000 from profit of A$12 million a year earlier.

Currency movements cut A$19 million off wine earnings. The Australian dollar has advanced 13 percent against the U.S. currency in the past year, the best performer among 16 major currencies tracked by Bloomberg.

Cost Cutting

Dearie aims to cut A$100 million of annual costs from Treasury by the end of June by reducing expenses for packaging, warehousing and bottling. He’s also targeting shorter production runs for brands such as Wolf Blass to enable it to trim inventory holding costs.

“Neither division seems to offer a huge amount of upside in the short term,” said Chris Weston, an institutional dealer at IG Markets Ltd. in Melbourne. “Beer volumes are and will be under pressure and the wine business is being aided by stringent cost-cutting measures.”

The Foster’s wine unit trails only Constellation Brands Inc. in revenue. Victor, New York-based Constellation agreed in December to sell its Australian and U.K. operations to Champ Private Equity of Sydney in a transaction valued at about A$290 million.


Before it's here, it's on the Bloomberg Terminal. LEARN MORE