The dismemberment of Fosters Group has now started, despite the company yesterday revealing that it had rejected a private equity offer for the company’s underperforming wine assets.
That approach, coming less than a month after rumours of an approach for the beer assets, puts the company into play, not as a full takeover, but as a break up.
Media reports said the approach came from US private equity group, Cerberus.
The news of the wine approach yesterday saw the company’s shares pop to a day’s high of $6.44, before the settled back to close at $6.34, the highest the shares have been since January 2008.
That was a rise of 4.5% on the day, or 27c.
Fosters shares are up just 8c from the level they closed at on August 23 when that speculation about the approach for the beer business was revealed.
They had closed at $5.84 the Friday before, August 20, so the rise since then has been 50c, or 8.5%.
Even though that story of a big brewery (SAB Miller was the big tip) making a pre-emptive offer for CUB and its beer business, it’s only a matter of time before two bids arrive at Fosters for both the beer business and the wine business, probably from different buyers.
At yesterday’s closing price, Fosters was valued at nearly $12 billion, so the beer business offer would have to be around $12 billion to get in the front door, seeing the wine offer was between $2.3 billion and $2.7 billion, and was rejected as being too light on.
That’s a big ask in the current indifferent climate for takeovers and private equity deals, especially at the top of the value scale.
Private equity groups have struggled to make bids in recent months and sell off assets into the market.
Instead they have preferred to buy and sell with each other.
Cerberus lost money for investors in its plays in Chrysler in the US and GMAC, the former finance arm of General Motors which the private equity firm owned 51%.
GMAC was rescued by the US Government in the GFC.
The suggested prices for the wine business would be around the top end of where the big private equity deals seem to be happening these days, the price for the beer business would be very challenging indeed.
Fosters said yesterday that:
"The Board of Directors of Foster’s Group Limited (Foster’s) has received an unsolicited expression of interest from an international private equity firm to acquire the wine assets of Treasury Wine Estates.
"The indicative, non-binding proposal involves a cash consideration of between $2.3 billion and $2.7 billion for 100% of the assets.
"After considering the value range in the proposal, the Board of Foster’s continues to consider that a separation of the Wine business from the Beer business through a demerger is most likely to represent the best outcome for all Foster’s shareholders.
"In addition, the high level of conditionality, the requirement for exclusivity and other terms of the proposal are considered to reduce the value and certainty of the proposal.
"Treasury Wine Estates is a leading global wine business with a unique portfolio of premium global brands.
"The business is making significant progress in implementing its transformation programme.
"The Board of Foster’s believes that Treasury Wine Estates is well positioned to grow over the coming years and thereby create additional value for Foster’s shareholders.
"The Board considers the indicative proposed value range, referred to above, significantly undervalues Treasury Wine Estates and its future prospects.
"Foster’s remains committed to the evaluation of issues, costs and benefits of a potential demerger, with work continuing to progress to schedule. However, the Board will continue to consider any proposal that is in the best interests of shareholders."
Analysts have valued Foster’s wine business at $1.7 billion to $3.5 billion, less than half the $8 billion the company spent assembling the business (It paid more than $3.5 billion for Southcorp alone).
A spokesman said the Foster’s board had considered and rejected the proposal early yesterday morning.
In August, Foster’s reported a net loss of $464.4 million for 2009-10, compared to a net profit of $438.3 million in the prior year.
The result included a non-cash impairment charge of $1.16 billion against the carrying value of the group’s wine assets.
Earnings from Treasury Wine Estates (as the wine business is now known) fell 27% to $221.3 million, with unfavourable exchange rates having a major impact.
On a constant currency basis, earnings rose 20.5%.
But cash flow improved sharply as the cost cuts and other changes took control.
Private equity look for strong cash flow in their targets and the wine business seems to be improving in that area.
