Foster's shares up 9% as beer–wine demerger sparks takeover talk

SHARES in Australian brewing giant Foster's leapt 9 per cent yesterday after news that it was splitting its wine and beer businesses was seen as plunging the firm into takeover play.

The demerger of the group's struggling wine arm from its robust beer business brings down the curtain on a A$7 billion (4bn) wine expansion that began in 1996 when the company bought Australian group Mildara Blass.

It continued with acquisitions until as late as 2005, adding Southcorp for A$3.2bn with its Penfolds and Lindemans brands. But earnings from wine, which accounted for 40 per cent of the group total as recently as three years ago, have slumped by nearly a quarter in tough trading conditions.

Theo Maas, an analyst at Arnhem Investment Management, said: "For the beer business, this is the first step on its way to being taken over."

Maas said he expected Amatil, SABMiller's Australian joint venture with Coca-Cola, to be a frontrunner for the beer unit. Molson Coors, which has a 5 per cent stake in Foster's, is also thought to be in the frame as a potential bidder, perhaps with a larger partner.

A Coca-Cola Amatil spokeswoman could not be reached for a comment.

Ian Johnston, who replaced Trevor O'Hoy as chief executive of Foster's in 2008 after A$770 million of writedowns in the wine business, said: "We are increasingly seeing the benefits of operationally separating the beer and wine businesses."

Foster's shares later closed up 7.4 per cent at A$5.53. The company, the world's second biggest wine business after Constellation Brands, said the demerger would yield A$100m in annual savings from 2011.

Analysts said Foster's wine business, accounting for a third of the company's overseas revenues, faced problems of oversupply and weak demand. They said it also faced headwinds from currency moves.

While global wine production since 2004 has stayed at 25-28 billion litres, consumption has fallen amid a global downturn. Foster's has responded by completing half its planned sale of vineyards and eliminating nearly 40 non-core wine brands.

The company will take a non-cash, after-tax impairment charge of A$1.05-1.2bn in the 2010 financial year on its wine assets, which it said might delay the dividend payment over the next 12 months.

The group yesterday forecast underlying earnings before interest, tax, depreciation, amortisation and significant items of A$1.05-1.08bn for the year to June, in line with expectations.

Foster's interim profit to December fell 13.5 per cent to A$355.7m.

• Brewing giant SABMiller is spending 170 million rand (15.3m) in South Africa to boost its beer sales during next month's football World Cup and fight back against new rival Heineken.