Life Through The Bottom Of A Wine Glass

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This story features CUSCAL LIMITED.
For more info SHARE ANALYSIS: CCL
The company is included in ALL-ORDS and ALL-TECH

By Greg Peel

FNArena has covered the demise of Foster’s ((FGL)) now for some time in ongoing stories. The bottom line is that analysts have long suggested the beer maker paid way too much to expand into wine through the 2005 Southcorp acquisition, that forecast synergies were unattainable, and that Foster’s push to be one of the biggest beverage merchants on the planet was a case of seeing the world through rose-coloured glasses. (that’s rose with an acute accent on the “e”).

Most of the above has now been acknowledged by the board – a board able to now speak freely while no longer having to support its CEO, now resigned. In O’Hoy’s defence, no one really predicted the demise of Australian wine in the US, which is at the heart of Foster’s problem. However, someone must always ring the bell at the top of the market, and in this case it was Foster’s. Australian wine had already enjoyed twenty years of notoriety and popularity across the globe, and its star had begun to fade. As Foster’s was buying Southcorp, British off-licences were moving Aussie vintages into the two-pound bargain bin. The writing was on the wall.

That the Foster’s board has now announced another profit write-down, along with a write-down of any goodwill in its wine business, matters not. The Foster’s share price has been on a steady decline since early 2007 and there was no secret as to why. Irrespective of the vagaries of drought and its effect on wine vintages, Foster’s US wine business has been in a terminal decline. Locally, the once iconic beer brand has also suffered. Foster’s had too many balls up in the air, and was looking like dropping all of them.

That’s why analysts are excited.

In all likelihood the board will now split Foster’s into the two divisions of beer and wine. This could be done internally, or could be done externally, such that the separate parts procure their own ASX listing. The latter case is the most exciting prospect, given Foster’s was never going to be a serious takeover proposition in its current form. Wine was a “poison pill”, such that a prospect of the likes of Coca-Cola Amatil ((CCL)), who has been desperately trying to break into the Aussie beer market, and who can call in the weight of the US parent, has never made a play for the ailing Foster’s.

By the same token, no international wine merchant has sniffed around, given the beer division would have to be taken on board as well. With O’Hoy in the saddle, there was never any talk of de-merging the different businesses. Yet for Foster’s, one plus one has not equalled three as a good synergy acquisition should suggest, but more like minus one.

What this does mean is that separately, the two divisions of Foster’s are worth more than the current sum of the parts. This is a classic opportunity to “unlock the value”, and all analysts agree the Foster’s share price should now be underpinned by such a potential. As the JP Morgan analysts put it:

“The strategic review and resignation of Trevor O’Hoy present opportunity for a significant change in direction for the company, and to liberate significant hidden corporate value locked in the beer asset base”.

While the value in the beer business has always been appreciated (it is impossible to go broke selling beer to Aussies), JPM even suggests the wine business could prosper were it refocused, with bureaucracy cut and service costs no longer shared. The Citi analysts are also enthusiastic, suggesting:

“The potential for improved operational execution…has materially increased”.

On that basis, Citi has upgrade Foster’s to Buy.

The only problem is, however, that none of this is going to happen overnight. That’s why all of ABN Amro, GSJB Were, Deutsche Bank and JP Morgan have maintained their Hold ratings. It’s all good news, but there are a lot of hoops to jump through yet, and the strategic review alone is slated to take four months. Indeed, UBS has decided to downgrade to Hold from Buy, acknowledging the earnings and asset valuation downgrades. Foster’s is still trading at quite a high multiple compared with the likes of Lion Nathan ((LNN)).

Both Macquarie and Merrill Lynch have retained their Underperform ratings. Merrills has been Foster’s biggest critic since a Southcorp acquisition was even suggested, and the analysts should be rightly feeling pretty pleased with themselves today. They are keeping their rating given the uncertainty that will ensue, but acknowledge that Foster’s is now effectively “in play”.

Macquarie agrees with the rating, but not the sentiment. Macquarie analysts are worried that the board sounded just too optimistic about apparently being able to resolve the structural issues internally, and thus they question any obvious takeover. Who might want the wine business anyway? Too much short term risk remains, they suggest.

So for the investor it’s a case of not needing to rush in, if the sum of the broker views is anything to go by. However, the downside now seems a lot more limited. The bottom drawer might be a good place for now, before cracking a cold tube later down the track, perhaps. Bazza McKenzie would be proud.

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