Foster's wine, beer split 'could lift shares'

FOSTER'S Group Ltd could consider a demerger of its wine and beer assets as the best way to revive its fortunes and lift its share price, analysts said on June 11.

The global beverages firm yesterday downgraded its earnings for fiscal 2008, flagged $770 million of writedowns on its wine assets and inventories, as it continues a review of its wine operations begun in April.

Chief executive Trevor O'Hoy took responsibility for the group's underperforming wine operations and resigned, as chairman David Crawfordsaid the company had paid too much for wine assets.

But Foster's said its beer business was strong.

UBS analyst Lindy Newton said although Foster's had indicated that it wine assets review would consider all options, maintaining the status quo would be difficult.

"In our view, Foster's best option is to consider demerging into two separate businesses - beer and wine - so that investors can decide which they prefer to invest in," Ms Newton said in a research note.

"We believe Foster's could extract value for shareholders via beer being more aggressively geared and potentially re-rated as a takeover target."

Wine was less likely to outperform as a standalone company given limited stock market appetite for such an investment.

But Ms Newton said that a demerger could lift Foster's share price by six to 23 per cent.

However, a demerger could take time to execute and creating a separate company would likely incur costs rather than save costs.

Merrill Lynch analyst David Errington said the Foster's board had put the whole company "in play".

"By this, we mean the board will, in our opinion, entertain any bid for any asset or indeed any bid for the entire company," Mr Errington said in a note to clients.

But he said a break-up of Foster's or a takeover would be risky given the parlous state of the wine industry and Foster's wine business. The business could be valued at around $6 billion, at a stretch, and the beer business at $13 billion. On a "stretch" break-up scenario, Foster's shares could be worth more than 50 per cent on the current price.

Mr Errington said he expected that Foster's underlying performance would get worse, with the resignation of Mr O'Hoy causing instability within management ranks and ongoing challenging conditions for the wine business, particularly in the United States.

Goldman Sachs JBWere analysts Ian Abbot and Alicia Chew said there was a real prospect that Foster's could in time become a purer play in the Australian beer market.

"A key question then is whether investors have underpriced Foster's, ie. in choosing to avoid exposure to the wine business have they overlooked hidden underlying value in the beer business?"

But the appetite for wine assets was an important consideration given that many large players in the beverages market preferred beer and spirits.

"It is difficult to find clear candidates who might be interested (and financially able) to buy the entire wine business," the analysts said.

Foster's beer assets were more attractive given renewed consolidation in the northern hemisphere as major players looked to gain scale.

Foster's shares were up nine cents at $5.54 at 1218 AEST today.

Foster's yesterday said it expects to report a non-cash impairment charge of $600 million to $700 million to the carrying value of its global wine assets in fiscal 2008.

Earnings per share growth in constant currency terms is expected to be between five and seven per cent in fiscal 2008, compared to the company's previous guidance of about 10 per cent growth.

Its profit before tax, significant items and self-generating and re-generating assets (SGARA) for fiscal 2008 is now forecast at between $700 million and $715 million.