Melbourne: Foster’s Group Ltd, Australia’s largest brewer, will keep its struggling $3.2 billion wine business and reshape it over time, as tough debt and equity markets cut out the option of a sale or demerger.
Foster’s, which makes Beringer, Penfolds and Lindemans wines, put the wine unit under review last June. The A$5 billion business, ranked behind only Constellation Brands Inc, has been a drag on overall earnings as returns fail to exceed the cost of capital.
The decision to keep the wine business is likely to dampen speculation that Foster’s could be a takeover target, with global brewers said to be ready to pounce if the firm’s reliable earnings from its beer business were unhitched from wine.
North America’s Molson Brewing Co last year took a 5% interest in Foster’s.
“The current difficult conditions in debt and equity markets mean this is not the appropriate time to sell or demerge Foster’s wine business,” Chairman David Crawford said in a statement.
The maker of VB and Crown lager beer posted a 3.2% increase in first-half net profit to A$411.3 million, and warned that because of the review there would be second-half write-downs and restructuring charges of A$330-A$415 million.
Global wine earnings before interest and tax rose 10.6% to A$243.3 million in the half, but would have declined 11.6% if not for favourable currency shifts. Australia, Asia and Pacific wine earnings fell 5.4% to A$77.7 million.
Foster’s shares were down 1% at A$5.20 on Tuesday, beating the broader market which was 1.5% lower.
There was little surprise in either the results or the wine review, said Theo Mass, investment analyst at Fortis Investment Partners.
“It was pretty much the only option that was left,” he said, adding the announcement of a fresh management team and planned cost improvements were a positive, as long as the operational synergies promised could be delivered.
Foster’s said it would deliver over A$100 million in cost savings in the 2011 financial year, partly through more than 300 job cuts. It will dispose of wine brands to focus on the most profitable, and sell three dozen vineyards in Australia and California.
Foster’s said it was reasonably well positioned in wine, but industry challenges included low barriers to entry, high asset intensity and the cyclical nature of growing grapes.
It plans to structurally separate the wine and beer businesses in a bid to improve operational performance.
CEO Ian Johnston said the structural separation was not a signal that the group ultimately wanted to demerge the two operations, as it had no intention of doing so.
He said the company was committed to managing the business for the long term.
“If the board is presented with some alternative scenario that someone wants to buy our business, then, of course, they will look at it, but our assessment is that that is unlikely,” Johnston said.