The global financial crunch and recession has forced Foster’s Group to retain its troubled wine business because of an absence of buyers.
Fosters, which revealed its interim results yesterday, had promised a decision on the future of the wine business at the same time as the interim figures.
When it came, the decision was a really a ‘non-decision" it’s being retained, but at a cost; another $300 to $400 million in write-downs, taking the total bill to around $1 billion in around a year.
What was interesting was the restructuring plans announced to accommodate the wine business, some of which might give it a chance of realising some potential in coming years.
Out is the absurd milt-beverage approach where the same group of executives could make, sell and market beer, cider, wine and spirits, and with in that group, low margin mass brands and high margin premium brands.
It’s been a policy at the company now for a number of years, having started in the Trevor O’ Hoy years when he was CEO, up to last April when he was flicked.
It didn’t work then, with margins under pressure, costs hard to stabilise and poor brand management.
It repeated the old fault from previous managements of treating wine as a mass brand to be flogged like beer, meaning that some of the wine business’s very profitable and prestigious labels were devalued (Grange, St Henri) and turned into the playthings of Woolworths and Coles and their huge retail grog chains.
Fosters has also undertaken its second write-down in less than a year, taking a hit of between $330 million and $415 million on its balance sheet including the cost of the restructure.
This is after a $700 million write-down on the value of its wine assets last year following the departure of Mr Trevor O’Hoy.
Foster’s shares rose 2.3%, or 12 cents, to $5.37, then fell in the afternoon to finish off 5 cents at $5.20 as investors questioned the wisdom of retaining the underperforming wine business here and in the US.
With Canadian group, Molson Coors in the share register with 5.26%, some analysts said keeping wine lessened the chances of a bid, while other suggested the separation of wine and beer increased that likelihood.
It won’t happen soon though with credit markets crunched and big bids hard to finance. Fosters would cost over $12 billion.
The latest write-downs and restructuring costs, which involved between $130 million and $165 million in cash and $200 million and $250 million in non-cash items, will be taken into Foster’s accounts in the current half year.
The decision follows the review of the wine operations launched by the board in April last year.
Following the review, some smaller wine brands will be ditched and 36 vineyards and 3 wineries in California and Australia will be closed reconfigured or consolidated by the diversified drinks company. This is in addition to the existing sales in the division here and in the US (and in Europe).
The company said it would pursue an efficiency program to "aggressively reduce costs" in overheads, procurement and manufacturing.
Chairman, David Crawford indicated that while the company was retaining the wine business for now, it would consider selling it off in the future.
"In light of the operational opportunities available to improve performance, the board has determined that shareholder value will be maximised by retaining the wine business," he said.
"The current difficult conditions in debt and equity markets mean this is not the appropriate time to sell or demerge Foster’s wine business.
"The performance of our wine business has been unsatisfactory. In large part this has been the product of poor execution in the Americas and pursuing a multi-beverage model in Australia.
“We are modifying our strategy and dramatically changing how we operate the wine business by installing a new management team under the leadership of (chief executive) Ian Johnston."
The wine decision overshadowed a moderate first half result.
Interim dividend is steady at 12 cents a share, so the board obviously doesn’t see the need to conserve cash in coming months.
Foster’s said net profit rose 4.5% to $411.1 million in the half.
"Cash flow remains excellent, pre interest and tax it was up 13.2% to $691.9 million. Cash flow after dividends was $155.9 million.
"Net sales revenue increased 2.2% and earnings before interest, tax, significant items and SGARA (EBITS) increased 4.5%.
“On a constant currency basis net sales revenue declined 0.9%, EBITS declined 1.8% and earnings per share increased 0.9%. There were no significant items in the period.
Mr Johnston said in a statement to the ASX that “In the face of very unique global trading conditions, our balance sheet is strong, our medium term funding secure and we continue to generate outstanding operating cash flows.
Beer, Cider and Spirits (BCS) in Australia, Asia and Pacific (AAP) continued to perform strongly with beer net sales revenue in Australia up 6.2% and AAP BCS EBITS up 5.6% on a constant currency basis.
“We’ve seen a strong comeback in Australian beer with underlying volume up over 3% for the half and we finished the year with around a 52% value share of the Australian beer market,” he said.
“Wine top line performance included share gains in key market segments in the Americas and the UK and strong bottled wine sales growth in Australia.
“Deteriorating global trading conditions are a challenge in wine, with a switch away from the higher contribution on-premise trade and consumers trading down on price,’’ Mr Johnston s
