Another day, another deal. It seems that Fosters cant help itself but undertake company-transforming transactions. This might be because management get a bit bored selling beer. Admittedly, the decision to split Fosters beer and wine businesses is a rare piece of good news for investors in the company, who have witnessed precious little capital growth for the best part of a decade. It is expected that the separation may "unlock" more than a $1 billion in value. That value had previously been stripped from the companys market capitalisation by investors who had long lost faith in Fosters ability to operate a remotely profitable wine business. Fosters made its first leap into wine in 1996 when former CEO Ted Kunkel purchased Mildura Blass. Kunkel, had been recruited in 1992 from Canadian brewer Molson to save Fosters after the disastrous reign of John Elliott (Fosters had previously been known as Elders Brewing, a division of Elders IXL). Not long after acquiring Mildura, Kunkel upped the ante and spent $2.9 billion buying US-based wine company Berringer. (Berrigner was bought from private equity group Texas Pacific in yet another example of why one shouldnt acquire assets from a private equity vendor). In what would become a common event, Fosters soon after wrote down the value of its Berringer Blass business by $300 million after a US wine glut depressed prices. Kunkel resigned shortly after and was replaced by long-time Fosters executive Trevor OHoy. Not long after taking the reins, OHoy increased the stakes once more, spending $3.7 billion acquiring Southcorp (which had itself undertaken a billion dollar loss-making merger with Rosemount a few years earlier). Fosters had been approached by Bob Oatley, the billionaire sailing enthusiast and founder of Rosemount, who still owned 18.8% of Southcorp (which he sold to Fosters for $584 million before Fosters launched its formal bid). Analysts and commentators questioned the acquisition at the time, but OHoy (who started working at CUB as a cadet in 1976) was publicly unrepentant, claiming that "we are clearly now on a double-digit growth pattern, around the 10% mark. Southcorp actually just enhances that. There is a few extra points of growth in it so that's terrific for me. The attraction for us is our three-to-five-year plan, it gives us that growth. The Southcorp deal just takes us to another level". (Privately, OHoy was understood to have been far more reluctant to purchase Southcorp, with the Financial Review reporting in 2008 that OHoy said in 2005 that he didnt want to do the Southcorp takeover but changed his position after he saw Fosters then chairman Frank Swans "horrified" reaction.) OHoy should have backed his instincts and rejected the lure of Southcorp. In the end, after this weeks $1.3 billion write-down, Fosters ended up losing about $3.5 billion on its wine forays. It appeared to take 14 years for Fosters to realise that while beer and wine are alcoholic, there are few other similarities between their manufacture, marketing and distribution. A wine glut certainly didnt help matters. Fosters wine debacle also casts a tremendous black mark alongside the career of one of Australias most prolific corporate directors, David Crawford. Crawford, one of Australias best-known insolvency experts, has served on the Fosters board since 2001. (Interestingly, while Crawford has been a vocal critic of corporate governance advisers, accusing them of having "parallel with credit agencies, particularly with conflicts of interests", he has not been as critical of "independent experts", such as Lonergan Edwards, which infamously deemed Southcorp to have been worth between $4.57 and $4.80 per share). Of course, not everyone was a loser -- for Fosters has long been a easy mark for Melbournes leading investment banks, who have reaped hundreds of millions of dollars from the brewer, come winemaker, come brewer, come takeover target. UBS was Fosters one such adviser, earning millions providing takeover advice and arranging debt for the Berringer acquisition, while Credit Suisse was the lucky adviser on the Southcorp deal. Fosters also infamously paid Macquarie Bank $100 million for the float of its ALH pub business in 2003.
As always do your own research etc etc
FGL Price at posting:
$4.48 Sentiment: None Disclosure: Held
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