Foster's rebuffs USD2.5 bn offer for wine

Foster's Group Ltd, Australia's largest brewer, has rejected a private equity offer worth up to $2.5 billion for its wine unit as too cheap and plans to continue with the split of its beer and wine businesses.

The bid for the world's second-largest wine business came as a surprise, boosting Foster's shares almost 6% to their highest since January 2008, on hopes it will attract better offers. Investors have been focusing on potential buyers for the more lucrative beer unit, which is seen as a cash cow with some of the highest profit margins in the brewing world.The ailing Treasury Wine Estates business, with vineyards from California's Napa Valley to the Hunter Valley near Sydney, had been seen as the unwanted child.

Sales of Foster's wine, including Beringer, Penfolds and Wolf Blass, have been hit by a deep US recession and a trend away from low-end, bulk wines in Australia. The strong Aussie dollar has also been a drag, slashing the value of US earnings.

"It seems like a nice little opening bid here, it is definitely going to speed up the process (of a sale)," said Arnhem Investment Management partner Theo Maas.

"But in terms of the value, it is lower than the book value. We are at the low point in the cycle and looking at very depressed earnings levels," he said, explaining the company's reluctance to accept the offer. The business is valued at A$3.1 billion on Foster's books, or about half the sum the company spent on wine acquisitions, following three huge writedowns.

Foster's has spent the last year overhauling the wine business, selling off unprofitable vineyards, changing U.S. distributors and focusing on higher-margin wines above $8 a bottle.

Analysts have valued the business at A$1.7 billion to A$3.5 billion.

Foster's shares spiked late last month after sources said brewing groups SABMiller and Asahi Breweries were looking at the company's beer operations, valued at more than $10 billion, but no firm bids have emerged.

FOCUSING ON COMPANY SPLIT

Foster's said the offer from the unnamed international private equity firm, worth A$2.3 billion-A$2.7 billion ($2.1 billion-$2.5 billion), was highly conditional and requested exclusivity, which it said reduced the value and certainty of the proposal.

"The Board considers the indicative proposed value range, referred to above, significantly undervalues Treasury Wine Estates and its future prospects," the company said. A deal for the wine unit would have been the largest buyout by a private equity firm in the Australian market since 2007.

The major international private equity firms with representation in Australia either declined to comment or did not return calls, including Blackstone, KR, Carlyle, TPG and CVC. Bain & Co in New York did not return calls seeking comment.

International private equity firms have shown renewed interest in cheap Australian assets this year, snapping up hospital owner Healthscope in July for A$2 billion. Foster's said it is continuing with its plans to split its beer and wine businesses in 2011 but left the door open to other offers.

"However, the Board will continue to consider any proposal that is in the best interests of shareholders," it said. Foster's spent over A$6 billion building its wine business, which ranks behind Constellation Brands Inc, with its acquisitions of California's Beringer Wine Estates in 2000 and Australia's Southcorp in 2006.

Earnings from the wine business rose 21 percent to A$221 million for the year to June 2010, but a massive A$1.29 billion writedown on the wine assets, the third for the unit, marred the group's bottom line.

Shares in Foster's were up 4.8% at A$6.36 at 0315 GMT, in a broader market down 0.6%. Foster's has hired Gresham Advisory Partners and Goldman Sachs to advise on the demerger.