Foster's to spin off wine unit as profit disappoints

Foster's Group, Australia's largest brewer, moved ahead on Tuesday with plans to split its beer and wine businesses, but it risked dampening bidder interest in either unit by also reporting soft first-half profits.

Foster's said the split, to be completed in May, would help each business pursue its own strategy after efforts to jointly market the two failed . The move might elicit suitors, especially for the $10 billion beer unit, one of the last prizes in the globally consolidating beer market. "As they do the demerger, it promotes the possibility of them becoming a target but the earnings will leave them looking somewhat vulnerable," said Angus Gluskie, portfolio manager at White Funds, which is a shareholder in the company. "An acquirer has to be comfortable that there are some structural declines in that industry, primarily the traditional beer brands are really struggling to maintain their place in the market," he said. The beer and wine units are expected to attract interest from trade buyers and private equity firms after they are separately listed. Foster's has already rejected one formal bid for the wine business, the world's second largest, which owns vineyards from California's Napa Valley to the Hunter Valley near Sydney and labels including Beringer, Penfolds and Wolf Blass. That offer was worth $2.5 billion. Declining taste for beer

Australia's beer market has declined in recent years, as wine consumption has risen. Government statistics showed that Australians drank an average of 107 litres of beer in 2009, the lowest reading since 1947. Foster's, which has been brewing its flagship brand since the 1880s and whose main rival is Lion Nathan, said it estimated the country's total beer market declined 7% in the six months to December, hurt by one of the wettest and coolest summers in decades. "Our financial results have not been as we would like them," Chief Executive Ian Johnston told an analyst briefing. But he said Carlton & United Breweries had increased its Australian beer market share, as its volumes fell 5.8%, less than the sector's overall decline. Before one-off items, total first-half profit fell 5.6% to A$335.7 million, below analyst forecasts for A$349 million. Consumer spending in Australia has been surprisingly subdued in recent months, with confidence under pressure from rising interest rates and retail sales weak across the board Foster's stock fell 1.4% to A$5.66 in opening trade on Tuesday, as investors focused on the disappointing beer results, before recovering to trade unchanged. The broader market was down 0.2%. In May 2010, Foster's first raised the prospect of splitting up its high-margin beer unit from the wine business, which has endured nearly A$3 billion of writedowns, after the strategy to jointly market beer and wine failed. At Treasury Wine Estates, first-half earnings were steady despite a 5.9% fall in volumes, as the company continued to focus on its premium brands. Foster's shareholders will receive one share in the new wine company for every three shares currently held. Treasury Wine Estates has annual revenue of A$1.9 billion (USD 1.9 billion). Treasury Wine Estates will be listed on the Australian Stock Exchange in May, subject to a shareholder vote in April and court approvals. Costs of the split-off of some A$151 million would be borne by Foster's. Wine is valued at A$3.1 billion on Foster's books, or about half what the company spent on wine acquisitions in a rapid expansion as it sought to offset flat demand for beer. Treasury ranks behind Constellation Brands as the world's second-largest wine company. Waiting in the wings?

Some analysts say suitors will want to see an improvement in demand for beer after a poor half before making any offers . "We don't anticipate any potential bid immediately after demerger, as we believe potential bidders may want to see stabilisation of beer (and wine) earnings first," said Nomura analyst David Cooke in a recent note to clients. Last month, a report that brewer SABMiller Plc may be clear to bid for Foster's USD 10 billion beer business sent the Australian brewer's shares up 4%. SABMiller already has a presence in Australia through its Pacific Beverages joint venture in Australia with Coca-Cola Amatil which distributes Peroni, Miller and other brands. SABMiller already owns the Foster's brand in India and has the US brewing rights. Another potential suitor, Asahi Breweries, ruled itself out of the running last week, saying it has no interest in buying any part of Foster's because the assets looked expensive and the market was tough. Private equity firms have shown fresh interest in wine of late, with one of Australia's largest buyout firms CHAMP buying 80% of Constellation's local wine business in December. (USD 1 = 0.997 Australian Dollars)