Foster's has proposed the same price per share as it paid for the 18.8 per cent stake in Southcorp that it bought directly from Bob Oatley, the founder of Rosemount Estates, and this explains the lack of enthusiasm from the Southcorp board.
Oatley is thought to have sold his shares at a discounted price in order to keep ownership of Southcorp in the Australian hands and away from foreign giants like Diageo or Allied Domeq, both of which are known to have considered making a bid. In 2001, Oatley sold Rosemount Southcorp at a knockdown price in order to prevent a bid from UK-based Allied Domeq
The move comes at a critical time for the wine operations of both Foster's and Southcorp after disappointing results of sales in the US, and fears of a tough year ahead for the Australian wine industry amid concerns of a further slow down in exports, partly due to the strong Australian dollar and knock-on effect of a red wine surplus that could push down prices.
Partly for this reason, Foster's had been expected to steer clear of acquisitions until late 2005 as sought to strengthen its balance sheet, and the 19 per cent stake it bought in Southcorp last week would alone have been large enough to prevent rival bidders from taking over the company. Under Australian law, a bidder needs acceptances for 90 per cent of a target company in order to acquire the rest, and Foster's could have bided its time before making a full bid.
But Datamonitor analyst John Band said that it made sense for Foster's to move now. "Foster's is in a good position to increase its market strength against Diageo and Allied Domeq, who are attempting to do to wine what they've done in spirits. At the moment, being a smaller company with some brands is not good enough."
He added that the merger of the two portfolios would have "good overlap", and would contain strength in both the US and European export markets. He believes that the absorption of management should be relatively trouble-free given that both companies are based in Australia.
If the bid is successful, the joint group will have total sales of about A$4.8 billion and wine sales of more than A$2.6 billion ($2 billion), second only to the US based Constellation Brands. Constellation bought Australia's BRL Hardy wines in 2003 and at the end of last year added California's Robert Mondavi Corporation.
Trevor O'Hoy, Foster's chief executive, said that Foster's would in fact have the upper hand over Constellation. It would, he said, be the world's leading retailer of wine in the above $3 per bottle category. The Constellation portfolio is stronger in lower and premium end wines, with the line of Hardy brands at one end and Mondavi at the other. The takeover would give Foster's dominance in the $5 to $10 price categories, and a platform to be a competitor in the global wine market.
This, said Band, is crucial to Foster's, whose primary business is no longer beer. "In 2003 Foster's sold more wine than it did beer. The Australian beer market is stagnating and the strength of the Foster's beer brand in Europe is being largely reaped by Scottish & Newcastle who built it. It might well make more sense to concentrate on wine."