Foster’s Keeps Wine Unit as Recession Deters Buyers

Feb. 17 (Bloomberg) -- Foster’s Group Ltd., the Australian brewer that spent a decade building the world’s second-biggest wine business, ruled out selling the division as the global recession makes it difficult to find a buyer.

The company will take as much as A$415 million ($266 million) in charges to close wineries, sell brands and cut 300 jobs after a nine-month review of the unit. The changes will save A$100 million a year, Melbourne-based Foster’s said in a statement today.

Chief Executive Officer Ian Johnston will create separate sales teams for beer and wine, scrapping the integration policy of predecessor Trevor O’Hoy after replacing him in July. Earnings at the division, which cost at least A$6.8 billion to create, have dropped amid rising competition and grape gluts that depressed bottle prices.

“The combination of wine and beer was very problematic because they are very different beverages to make and sell,” said Theo Maas, who helps manage $5 billion at Fortis Investment Partners in Sydney, including beverage stocks. “They really had no alternative but to look for an internal solution because they don’t have the sale options of nine months ago.”

Foster’s has been weighing the future of the wine unit, which owns brands including Penfolds and Rosemount, since O’Hoy quit in June.

Shares Slide

Foster’s shares fell 1 percent to A$5.20 at the 4:10 p.m. market close in Sydney while the benchmark S&P/ASX 200 Index fell 1.5 percent. The stock has posted two annual gains since 2001.

Johnston will sell 36 vineyards representing 5,000 hectares (12,355 acres) of grape-growing land in the U.S. and Australia. The company will also sell or end 37 “tail” wine brands, which had A$60 million of sales in 2008.

The writedowns of between A$300 million and A$415 million will be taken in the second half ended June, Foster’s said. In 2008, the company had wine writedowns worth A$602.9 million.

“The current difficult conditions in debt and equity markets mean this is not the appropriate time to sell or de-merge Foster’s wine business,” Johnston said in a statement today.

Foster’s embarked on its wine expansion in 1996 as it sought to limit the impact of stalling beer sales by paying A$482 million for Mildara Blass Ltd. In 2000, it moved into California with the A$2.6 billion purchase of Beringer Wine Estates Holdings Inc. before buying Southcorp Ltd. in 2005 for A$3.2 billion.

‘Unsatisfactory’ Performance

The Australian beer sales team will be split from wine, spirits and cider.

“The performance of our wine business has been unsatisfactory,” Johnston said. “In large part this has been the product of poor execution in the Americas and pursuing a multi-beverage model in Australia.”

Foster’s had earnings before interest and tax from wine of A$243.3 million in the six months ended December, compared with A$253.7 million for the same period in 2002.

Constellation Brands Inc., the world’s largest winemaker, announced plans to sell vineyards and production plants in August. The Fairport, New York-based company put three of its 10 Australian wineries and 20 vineyards up for sale to reduce debt.

Australian Vintage Ltd., Australia’s third-largest winemaker, is completing its strategic review, which may include asset sales, Andrew Kovacs, an analyst at Macquarie Group Ltd., said in a report before the announcement.

Profit Rises

Foster’s also announced a 3.2 percent rise in first-half earnings, with net income rising to A$411.3 million in the six months ended December, its fiscal first half. The result beat the A$401 million median estimate of seven analysts Bloomberg News surveyed by telephone and e-mail.

Foster’s “traded well” in January, Johnston told analysts on a conference call. He declined to give a second-half profit forecast.

First-half earnings before interest and tax in Australia and the Asia Pacific fell 2.3 percent to A$503.6 million as demand for beer such as Pure Blonde was more than offset by declining wine sales and a fall in the Australian dollar.

The Australian currency was the fourth-worst performer against the U.S. dollar of the 16 most-active currencies in the six months ended December. It dropped to 60.10 U.S. cents in October, the weakest since April 2003.

Foster’s said earnings from the Americas rose 19.3 percent to A$117.3 million as the slump in the Australian dollar against its U.S. counterpart boosted earnings. In constant currency terms, profit from the Americas fell 11 percent on an 8.1 percent drop in sales volumes.

Profit from Europe, Africa and the Middle East rose 30 percent to A$58.7 million.