Foster's launched a hostile A$3.1 billion offer for Southcorp two months ago, but has seen its bid rejected by the smaller group on the grounds that the A$4.14 per share offer undervalues the company - Foster's would need to up its offer to around A$4.57-4.80 to assure its success, according to an independent valuation of Southcorp.
But while Southcorp's board has persistently said that its preferred option would be to continue at the helm of the company - not surprisingly, given its success in turning it around in the last few years - it has nonetheless come up with an alternative to Foster's offer, which it presented to the company's shareholders earlier this week.
A merger of Southcorp with Foster's wine division, Mildara Blass, would be a win-win situation for both companies, Southcorp suggests, creating the world's largest producer of premium wine and Australia's biggest producer, not to mention generating some A$148 million in synergy benefits.
Southcorp's proposal was to issue up to 765 million shares, raising around A$3.4 billion in order to acquire Foster's wine business on an ungeared basis. It would then buy back its shares on a 1-for-10 basis at A$4.70, the middle of the range of the independent valuation.
This proposal would leave Foster's with a controlling interest of 57-60 per cent in Southcorp with no additional cash outlay, while allowing Southcorp's shareholders to continue to benefit from the firm's turnaround.
But Foster's remained largely unconvinced by the proposal. "The announcement by Southcorp…is a clear acknowledgement that Southcorp is actually for sale and confirms that there is a compelling strategic rationale for a combination of Foster's and Southcorp, and that it is time for such a combination to occur," the company said in a statement.
Not surprisingly, Foster's main target was the independent valuation of Southcorp on which the company's proposal was based. "It implies a stand-alone value for Southcorp of only approximately A$3.10 per share and even this relies upon successful execution of Southcorp's recovery story, which is unproven and at risk. In light of this, it is difficult to see how Foster's offer price of $4.14 cash per share (a 34 per cent premium to $3.10 per share) is considered anything other than an outstanding one for Southcorp shareholders,"
While Foster's said that it would consider the proposal, it pointed out that the idea had already been raised by Southcorp, and rejected by Foster's, when the two companies were in discussions in mid-January, when Foster's first acquired its 18.8 per cent stake in the company.
Southcorp's offer not only undervalued Foster's wine business, it also produced fewer synergies than Foster's own proposal, the company added.
With the valuation of Southcorp - on which its offer is based - looking somewhat over-optimistic (given that it assumes the continued improvement in the company's performance which is by no means guaranteed in the increasingly competitive global wine market), there appears to be little chance of this proposal being given any serious consideration by Foster's, and most observers believe it is simply a move to cajole Foster's into stepping up its offer.
Whether this will be a successful ploy remains to be seen - Foster's has already said it is happy to remain a minority shareholder in Southcorp for as long as it takes - but with little sign of Southcorp's shareholders being ready to give in to Foster's, something will have to give.