World Business

Foster vs Foster's battle hits Australian wine behemoth

By Robert Fenner (China Daily)
Updated: 2010-06-05 09:59

A winemaker shifts oak barrels at Coldstream Hills Winery, owned by Foster's Group Ltd, in Yarra Valley near Melbourne, Australia. Carla Gottgens / Bloomberg

Drinks giants' earnings hit by grape glut, competition from smaller rivals

MELBOURNE - Adam Foster's annual wine production of 2,500 cases is a fraction of the sales of Foster's Group Ltd, the world's second-largest producer. Yet it's a factor in breaking up the rival he shares a name with.

Foster's Group, the Australian brewer that sells lager in 150 countries, spent A$7 billion ($5.9 billion) building its wine unit, acquiring such labels as Beringer of the Napa Valley. Wine earnings fell 53 percent in the six months through December on a grape glut, currency moves and competition from thousands of smaller rivals unencumbered by shareholder and analyst expectations.

After a decade, investors are left with about A$2.5 billion of dollars worth of writedowns and a stock that has gained 18 percent since the start of 2001, or less than half the 39 percent rise in the benchmark S&P/ASX 200 Index. Chief Executive Officer Ian Johnston said on May 26 he plans to spin off the wine business.

Foster's Group "just don't seem to know whether they are selling beer or wine, but my customers know what I do because I do it all myself", said Adam Foster, 35, who started making wine in 2004 in a friend's vineyard. "I do this for my lifestyle and that is what drives me, not trying to make a million cases or dollars a year."

He produces wine under the Syrahmi label that sells for about A$50 a bottle as well as Foster e Rocco, a joint venture with Lincoln Riley, the sommelier at Gordon Ramsay's Maze restaurant in Melbourne.

Australia has about 2,300 wine companies and is the world's sixth-largest producer, according to the Australian Wine & Brandy Corp. Foster's Group gets 32 percent of its A$4.7 billion of annual sales from outside Australia, New Zealand and Asia, most of which is in the wine unit.

"There are lots of little irrational Davids in the wine industry and many of them are not in it for an economic return," said Theo Maas, who holds shares of Foster's Group among the A$5 billion of equities he helps manage at Arnhem Investment Management in Sydney. "Many are in it for lifestyle, which makes it hard if you are the goliath."

Currency moves sliced 13 percent off earnings in the six months ended December, compounding problems for Foster's Group, which paid "too much" for wine assets and has struggled to increase prices in the face of rising production, Maas said. The company makes 36 million cases of wine a year, generating A$2.1 billion in sales.

Foster's Group shares were unchanged at A$5.59 at 10:45 am in Sydney on Friday. The stock has risen 1.6 percent this year and posted two annual gains since 2001.

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The company's wine business may be worth as much as A$4 billion given its brands, vineyards and inventory, Morgan Stanley analyst Martin Yule said in a May 31 report.

The Australian dollar has risen more than 20 percent since the beginning of 2009. The gain helped slice earnings before interest and tax by A$83 million in the six months ended December.

Foster's Group made its first wine acquisition in 1996 with the A$482 million purchase of Mildara Blass Ltd. It paid A$2.7 billion for California's Beringer Wine Estates Holdings Inc in 2001, and its A$3.2 billion purchase of Southcorp Ltd in 2005 cemented its ranking as the world's second-biggest winemaker.

Top-ranked Constellation Brands Inc, based in Victor, New York, has taken more than $500 million in wine impairments and restructuring charges in the past two years.

Bloomberg News