Foster's Has First Loss in 16 Years on Wine Writeoff

Australia's biggest beer and winemaker, posted its first loss in 16 years after writing down the value of its global wine business by A$602.9 million ($517 million).

The company turned to a net loss of A$286.9 million in the six months ended June from net income of A$412.7 million a year earlier. Second-half figures were calculated by subtracting first-half earnings from the A$111.7 million full-year profit the Melbourne-based company reported today. Excluding items, Foster's annual profit was A$713 million, within its forecast.

Chairman David Crawford is reviewing the wine unit and may exit a business Foster's spent A$6.8 billion and ten years creating as an Australian dollar that reached a 25-year high and increased competition cut earnings. Ian Johnston stepped into the acting chief executive officer role last month to stem market- share losses after the departure of Trevor O'Hoy, who oversaw a doubling of the brewer's wine assets in his four years in charge.

``The relatively clean result was ahead of our expectations and at the top end of the guidance range of A$700 million to A$715 million,'' Andy Bowley, a Citigroup Inc. analyst in Sydney, said in a note to clients today.

Shares Climb

Foster's shares rose 11 cents to A$5.44 at 11:01 a.m. in Sydney and have fallen 17 percent this year. The stock has posted two annual gains since 2001.

Earnings-per-share growth before items and currency gains rose 7.9 percent, compared with the forecast 5 percent to 7 percent growth range given June 10, the day O'Hoy resigned.

The company didn't provide a forecast for future earnings.

Foster's is the world's biggest winemaker after Fairport, New York-based Constellation Brands Inc., which announced its own writedowns to Australian assets worth $95 million this month.

Global wine earnings before interest, tax and charges for the half dropped 32 percent to A$168.7 million. The rise in the Australian dollar cut about A$70 million from earnings, with profit down 1.8 percent in constant currency terms.

Wine volumes, which includes sales of brands such as Rosemount, Beringer and Lindemans, dropped 5.7 percent to 38.7 million cases on lower demand for Australian wine in the U.S. and reduced domestic sales of cask, or bag-in-a-box, wine.

Wine-Business Review

``Put simply, financial returns from wine have not met our expectations,'' Johnston said in the statement. ``We are making good progress with our wine review but won't be commenting on our analysis or conclusions until the review is completed.''

The wine unit may be worth about A$3.8 billion, according to analysts at Credit Suisse Group, or about 44 percent less than the company spent creating it. Crawford will consider ``all alternatives'' for wine, which may include keeping or selling it, or spinning the business off to shareholders.

``The investment community would love to see the wine business go, but finding a buyer will be difficult,'' said Theo Maas, who helps manage $5 billion of equities at Fortis Investment Partners in Sydney, including beverage stocks. ``Given the low valuation that the market attaches to this business, it might be worthwhile to try and improve the profitability before making any decisions.''

Second-half beer, cider and spirits earnings in Australia and the Asia-Pacific region rose 6.4 percent to A$346.8 million in the second half, helped by new products, while wine earnings fell 6.8 percent to A$86.1 million.

During the period, Foster's started selling Cascade Green, which it said is the world's first carbon offset beer.

Victoria Bitter

Foster's has 7 of Australia's top 10 brands, including Victoria Bitter, the nation's biggest seller.

Earnings from the Americas slumped 52 percent to A$52.5 million as slowing economic growth in the U.S. curbed demand for wine in restaurants.

Earnings from Europe, Africa and the Middle East fell 2.9 percent to A$42.2 million as the company shipped more wine to Scandinavia in lower margin bulk form.

The company said its search for a permanent replacement for O'Hoy is ``progressing according to plan'' without providing details.

``With few surprises in the 2008 result, investor attention will turn to the strategic wine review and the search for a new CEO,'' said Citigroup's Bowley, who rates the stock ``buy.'' ``We are confident that both will be concluded by calendar year end and remain positive catalysts for the stock.''