Fosters’ splitting headache

In one of the least surprising and most long awaited shock announcements, Foster’s is to split into two separately listed beer and wine businesses.

This pretty much brings to an end the financial carnage emanating from Foster’s purchase of Southcorp Wines for $3.7b back in 2005. This was a classic case of overestimating synergies (and commitment bias, whereby the firm paid $400m than their initial offer rather than walk away from the deal). The firm’s original estimates were for $270m-300m in efficiency gains within the first three years.  These never seem to have eventuated, and the firm got hit with a further whammy in terms of the Aussie dollar heading in the wrong direction (and rendering the export business much less competitive).  The firm has written down a huge chunk of the value of it’s wine assets (including another $1.1b yesterday).

One valuation has put the value of the wine business at around $2.1b – which isn’t a great outcome given Foster’s also bought Berringer Wines for $2.5b back in 2000. The devaluation is no shock given the glut in grapes and weaking competitiveness of Aussie plonk.

So much for diversification reducing risk!

What will be fascinating is what happens to Foster’s Beer Arm when this split finally comes to fruition. The Aussie beer market is a very appealing, low risk, consistent margin market (at least for the two big players).  It is very possible we’re going to see Foster’s under the acquisition microscope, with almost every big brewer other than Kirin (who own Lion Nathan) possible suitors.

As I’ve said before, Moors Colson, SAB Miller and Anheuser-Busch Inbev could all squeeze Fosters’ into their global portfolios quite nicely.  Asahi may also want access to the profit taps of their Japanese rival (and presumably won’t cop too much grief from the regulators about their existing soft-drink assets down under).

The dark horse in all this might still be Coca Cola Amatil, although their announcement this week that their young Aussie beer business is in the red might reduce their enthusiasm.

Interesting times indeed.

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More action brewing?

The moves in the usually dormant Australian brewing sector just keep coming. A month or so after Lion Nathan made a play for Coca Cola Amatil (discussed in this post), we see another takeover, this time from Japanese brewer Asahi.

Asahi look have puchased the Australian Schweppes business from Cadbury. This gives them access to various soft drink, bottled water and cordial brands, including the bottling and distribution rights to Pepsi and Gatorade stables down under.

On all accounts, Asahi outbid fellow Japanese beer giants Suntory and Kirin, as well as Coca Cola Amatil (CCA). It is still possible the US Coca Cola Company (CCC) could scupper the deal with a counter offer (due to a “last rights” arrangement dating back to the late 1990s). It is unclear whether CCC will exercise this right, nor is it clear how Australian competition regulators would view a greater Coca Cola presence in the market. Also CCC would need to offload the Pepsi business thus reducing the gains from any purchase.

While soft drinks (and other non-alcoholic beverages) are undergoing such a shakeup, the big questions remains whether Asahi are planning to also expand into brewing down here. Currently, their beers are distributed through Fosters in Australia. It is conceivable that Asahi could expand into their own brewing and distribution using the Schweppes facilities and value chain. Asahi have been innovators before. Their launch of the Super Dry product is much studied, as it launched from a minor to a major player in the Japanese market.

Or perhaps they are just going to bombard our market with a huge range of soft drink products from Japan. Canned coffee anyone?