Foster's set to shake up wine division

AFTER eight months effectively acting as an executive director, Foster's chairman David Crawford will next week deliver the results of his wine review. It will be seen as a welcome rationalisation -- but well short of a revolution.

The fact is that not only would it be difficult to offload the $5.7 billion wine division over the next 12 months, but the business will need the support of beer's cash flow more than ever.

This, however, doesn't mean beer and wine must be run as one because, as Merrill Lynch's David Errington points out, wine is grown in the country, produced once a year and sold some time later, but beer is made 365 days a year in the city and sold shortly thereafter.

They are different businesses.

Crawford's old football pal, Ian "Choco" Johnston, the interim Foster's boss, will apply his marketing skills from Cadbury days to lead what will be sold as revolutionary changes within the company, but short of a formal split.

Wine may need beer's support, but it should earn its keep. So just like Australian Vintage, Constellation and others, Choco has worked to restructure the Foster's wine business by rationalising the brand portfolio away from the low end.

He will stress the new accountability within the company, the concentration on relationships with customers and on speed to market, and in the process will further shake up the management ranks, with US wine boss Scott Weiss surely challenged to hold his job. Choco has brought in new talent, which will be unveiled in full on Tuesday.

Last year, Crawford cut the value of the wine business by $1.3 billion or 19 per cent -- $600 million of which was a fiddle in shifting wine goodwill to beer. There will be more write-downs.

The good news for Choco is the balance sheet is strong, with interest cover of 15 times and an estimated $15 million boost to earnings before interest and tax thanks to a lower Australian dollar, which on present trends will deliver a much larger windfall in the second half.

Currency gains are of course just fluff and after 10 months of investigation led by the chairman the market will be expecting a credible outcome from the wine review.

The profit results will be more of sideshow, but net profit is expected to be around the $401 million mark, up 1.4 per cent on a year ago.

While the company has outperformed the market over the past year by standing still, it has underperformed against its peers in the past three months. After a 10-month gestation there will be a real problem in managing expectations of the wine review.

At the very least, the new, more accountable company should have the board perform its oversight role, leaving Choco and his new team to deliver.

Power play over China deal

DETAILS of the Rio Tinto-Chinalco deal have sparked a flurry of activity -- commercial and political.

A formal application for Foreign Investment Review Board clearance was expected to be lodged either yesterday or early next week and a delegation from Chinalco will be in Canberra to press its case.

Politically, the answer is not much can be done, nor should there be. But, then, the Chinese haven't helped themselves.

Bloomberg yesterday quoted China Iron and Steel Association secretary-general Shan Shanghua saying of the tie-up: "This will help China break the duopoly in Australian iron ore supply over the long term."

This of course was not the message Chinalco's vice-president Lu Youqing was sending. He insists that his company is just one of more than 100,000 or more in China competing with one another. The investment in Rio is just a rational product and geographical diversification by Chinalco. It must be said that Chinalco has handled the transaction superbly.

Still, in a briefing with The Weekend Australian yesterday, the Chinalco message was tightened midstream after several answers rejecting the notion of a conflict between the company's status as an investor in and consumer of Rio. It was refined to say that Chinalco hardly ever bought anything from Rio, so how could there be a conflict?

The outside view of course is that the $US19.5 billion ($30 billion) China Development Bank-funded deal is a national play aimed at offsetting the market power of the big iron ore producers -- Rio, BHP Billiton and Brazil's Vale.

This means the aim is to reduce price tension, but this assumes Rio is the only game in town, which it is not.

BHP is playing a silly game trying to wrap itself in the national flag on this deal because it simply lays a trap for its next transaction.

Its Blake Dawson paper, which details the broken promises made by Rio when it became a dual-listed structure, misses a crucial point in that the company was always foreign controlled.

What, then, is wrong with foreign money?

There is very little of concern in this deal to trouble Wayne Swan. Instead, this deal should be defeated on shareholder concerns, of which there are many.

BHP could come to the table with an alternative proposal based on the fact Rio has arguably put itself into play. BHP's moaning to government simply highlights its frustration at being unable to complete its planned takeover.

Far better, then, to offer a commercial solution. This should not be hard given Paul Skinner and Tom Albanese, as the heads of Rio, have just blown up $US8billion of shareholder cash on the Alcan deal.

Dividends a crisis casualty

AMP'S Craig Dunn yesterday managed to do the impossible -- slash dividends by 27 per cent but get a positive share market reaction for the simply reason that the company is just fine and the move was not unexpected.

The good news from Dunn's market briefing yesterday was confirmation that operating earnings increased from $770 million in 2007 to $800 million last year.

The company raised $450 million from investors last year at $5.30 a share and there is little sense in using this capital to top up a dividend when the payout ratio is already a healthy 90 per cent for the planned 16c-a-share second-half payment. Last year's dividend was 46c a share, which represented a 130 per cent payout ratio.

The headline numbers from AMP of course will not look great because the S&P/ASX200 index has fallen 37 per cent over the past year.

It won't affect the AMP result, but the Australian market has held up well this week, rising more than 2per cent against falls in New York and London. Some 36 companies have reported their results this week, representing a stunning 40 per cent of the market's total value.

While the big ones came on in line with expectations, there were disappointments in the quality, with Leighton, for example, better on revenue but worse on margins.

Macquarie Equities has slashed estimates for the year, tipping 2008-09 financial year earnings per share to fall 10.6 per cent against last year's 1.6 per cent fall.

The downgrades have come thick and fast in the past month, and the team is now forecasting a 17 per cent fall in bank earnings, 14 per cent for property companies, 10 per cent for resources and 5 per cent for industrial. On UBS numbers, the market is selling on a 10 times price-earnings ratio -- down from the long-term average of 14 times -- and a massive yield of 6.3 per cent against the average of 4 per cent.

Dividends of course will be the early casualty of this downturn.

The Australian market rallied yesterday afternoon on news the Government's stimulus policy had been approved. But the one-liner doing the rounds yesterday explained government policy well: "We don't know what we are doing, but we are doing a lot of it."