Talk about dud financial deals, especially takeovers.
Fosters yesterday admitted that the $3.7 billion takeover of Southcorp for its wines business in 2005 was a dud, a complete failure with another $1.1 to $1.3 billion in write-offs.
So, subject to the market and the economy being right, the company is to demerge its beer and wine businesses and list them on the stock exchange.
The latest write-downs and losses come on top of the $770 million in write-offs in 2008.
There was a further $415 million in write-downs revealed in February, 2009.
So all in all the Southcorp buy has been shown to be a value-destroying deal and only benefitted the selling Oatley family who received $584 million for its 18.8% of Southcorp, and other shareholders in what was the biggest wine company in the country.
They got $4.17 a share for their Southcorp shares.
At that price and the Fosters price of around $5.53 yesterday, the other wine businesses (Beringer in the US) and the huge CUB beer business and distribution deals only have a value of $1.36 a Fosters share, which is silly.
So all up the write-offs could total $2.5 billion before tax, meaning the remaining wine business (including the US Beringer) and Southcorp, is worth considerably less than over $6 billion Fosters paid.
Taking into account the cost of buy Southcorp, Beringer ($2.6 billion), Mildara Blass ($480 million in 1996) and several other assets, Fosters invested more than $6 billion in the past 14 years.
With yesterday’s statement, more than 40% of that has or will be written-off.
So now we have the corporate house cleaning to deliver on the promise over a year ago to try and add value to the company for shareholders, with a split-up of the business a first option.
The slump in the markets delayed the delivery of that promise, but yesterday Fosters revealed its intention to go ahead with it in a trading update.
The shares jumped almost 10% at one stage to a high of $5.60 before settling back to end up 7.4% at $5.53, for a rise of 38c on the day.
That sounds good, but the 52 week high of $5.89 was in last September and the most recent high in the past five years was $7.25 in early 2007 amid pre-crash speculation of a takeover.
But the split will effectively end the idea that Fosters could be a global liquor giant, in the manner of larger groups such as Pernod Ricard and Diageo.
It is also likely that after the separated businesses are listed, one or both could be snapped up by bigger overseas rivals, although the possibility of that happening will depend on the conditions of financial markets and the availability of finance.
Fosters talked a lot about creating an integrated grog group with wine, beer, spirits and ready to drink products all under one corporate roof and with geographical diversification for the wine business in Australia and California.
It was a heady dream, but one that became a mirage as payoff day got further away, management and boards at the group changed in a search for stability and earnings and sales and profits went nowhere.
There were external problems: the global financial crisis, recession, especially in the two big US and UK markets, which forced consumers away from many of the wines that Fosters produced, down to cheaper bulk and low margin products.
And there was the grape glut in Australia (where drought hurt as well) and California, that turned into a grape and wine sea with the advent of the slowdown.
And shareholders will suffer a loss of income, not a cut in dividend, but a delay, according to Fosters yesterday.
"As a result of the non-cash impairment charge, the timing and payment of dividends over the next 12 months is expected to change, although the total amount received by shareholders is anticipated to be broadly in line with previous years," the company warned.
Fosters paid shareholders 27.3c a share in 2009. It says it hopes to match that in 2010-11, but payment may be late.
Fosters also revealed that it expects EBITS of $1,050-1,080 million for year ending 30 June 2010 "broadly in line with consensus estimates".
"Foster’s expects to recognise a non-cash impairment charge of $1,100-1,300 million (pre-tax) to the carrying value of its wine assets in the 2010 financial year.
"No decision has been made on the structure or timing of a demerger, which will depend upon, among other things, prevailing economic and capital market conditions.
"A demerger will be subject to all regulatory and statutory approvals and is unlikely to be implemented until the first half of calendar 2011, at the earliest," Fosters said.
Brokers reckon (are they trying to generate fee income?) that Coca Cola Amatil could be interested in the beer business (Terry Davis, the CEO, used to run the wine business of Fosters).
CCL has a beer jv with SAB Miller, the world’s number two beer group.
