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How to speak Australian? Those witty TV ads from the beer behemoth Down Under claim Foster's is "Australian for beer, mate!" But before long, Foster's could end up being Australian for "takeover."
The catalyst for a bid for the brewer could be its $1.7 billion acquisition last year of California's Beringer Wines, the world's No. 3 wine maker. Foster's no-nonsense, New Zealand-born CEO, Ted Kunkel, has been toasting the Beringer purchase as one of the two defining deals he has made since landing behind the bar at Foster's in 1992. The first was his $1 billion rescue of the troubled brewer after it had become the subject of a bitter takeover battle involving the cream of corporate Australia. Kunkel, 57, is a career beer executive who ran Canada's Molson Breweries before taking the top job at Foster's.
ENTICING TARGET. Takeover speculation started swirling around Foster's after a sudden run-up in the company's shares in the wake of the Beringer deal. Foster's shares shot up 23%, to $2.75, after the deal was announced in August, though they've since fallen slightly, to around $2.60. Beringer was on the acquisition lists of many of the European giants that dominate the global wine industry. They regard wine as a sexy growth sector, particularly in the U.S., which has one of the developed world's lowest consumption rates. The winery remains an enticing target to drink leviathans such as Britain's Diageo, France's Pernod Ricard, and the Anglo-Spanish Allied Domecq.
Foster's does seem like a prime target. It has an Australian wine division, Mildara
Blass, a diversified shareholder base (the biggest shareholder, Wall Street's Capital Group, has no more than an 11% stake), and a strong shelf of beer brands. The company dominates its home market and is the No. 2 brew in Britain, No. 8 in Europe overall, and the only non-European brand in the top 20 there. Foster's also claims to be the most popular foreign brand in the major markets of India.
Building that reach hasn't been easy. Foster's made a series of near-fatal missteps in China during the 1990s. India aside, its emerging-market efforts have been painful. And few analysts think beer sales have a frothy future. The market is mature, and in recent years, boutique beers and microbrews have been trendy, not mass-market brews like Foster's.
STOCK STAMPEDE. However, there's barely an analyst who follows the global drinks market who doesn't have a buy on Foster's. The analyst accolades cite imaginative management, efficient production, and sturdy market share. But the company's shares also are getting a boost because foreign, mostly American, institutions have stampeded into the stock since the Beringer deal, says Foster's chief financial officer, Trevor O'Hoy.
Tops on the list of predators with their eyes on Foster's is Diageo, the big British burgers-to-vodka concern born when Grand Metropolitan PLC merged with Guinness PLC in 1997. The London-based company has targeted the U.S premium drinks market in a big way. Just before Christmas, a Diageo-Pernod joint venture took out the wine and spirits division of Montreal-based Seagram, which includes brands such as Martell, Mumm, and Chivas Regal, for $8.15 billion. It was a good buy but was thin on the wine side.
Foster's seems almost sanguine about the prospect of a takeover. Says a philosophical CFO O'Hoy, "Companies get taken over for two reasons: good management and bad management. We reckon we fall into the former." He adds, "We spend no time or money on takeover defense."
HEFTY EARNINGS. O'Hoy says the price of Foster's would start out at $6.7 billion -- three quarters of which is its current market capitalization, and the other quarter, debt. On top of that, there would be "the acquisition premium," he says. The buyer would get a company that earned a hefty $232 million on annual sales of $2.3 billion last year. Beringer would add earnings of about $24 million on sales of nearly $400 million annually.
A buyer interested only in the wine side and driven by consolidation, such as Diageo, might see Foster's beer brands as mature and superfluous to its needs. Then a breakup likely would follow, with the brewing division perhaps falling to Heineken, Belgium's Interbrew, or one of the big Japanese brewers, which also have been sniffing around the Southeast Asia brewing giant San Miguel, where a 27% stake has come up for grabs in Manila.
Foster's management recognizes there are few obstacles to a bid. After being one of the world's most cosseted economies, successive reformist governments in Canberra have turned Australia into one of the most accessible markets for foreign investors. Foster's may be considered a national treasure by died-in-the-wool Aussies. But to the rest of the world, it may just be takeover bait.
By Eric Ellis in Singapore Edited by Thane Peterson
Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
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