Treasury Wine Estates may enter 'downgrade cycle': Credit Suisse analyst

ANALYSTS aren't overly merry about Foster's spin-off Treasury Wine Estates, with the majority initiating coverage at a hold or worse.

TWE, which kicked off its public life yesterday with a debut in line with market expectations, holds Foster's wine brands like Penfolds, leaving Foster's with its suite of beer brands.

UBS and Goldman Sachs today initiated coverage of TWE, which has a market value of about $2.2 billion, at a hold, while Credit Suisse took a harsher view, starting up at underperform -- an effective sell.

"We think the stock will enter a downgrade cycle. That will put off any private equity buyers until the earnings are in the clear," said Credit Suisse analyst Larry Gandler.

Foster's last year rejected an up to $2.7bn bid for TWE from US private equity firm Cerberus Capital and the "new" Foster's is also expected to yield interest.

Morningstar analysts value Foster's at $5.20 to $5.80 based on full-year 2011 estimates and similar metrics as Kirin's purchase of Lion Nathan in 2009.

But a number of impediments, including the strong Australian dollar, have some analysts talking down a near term bid for Foster's.

"We count the potential suitors as few. We believe that the full trading multiple of the stock and the high Australian dollar-US dollar may keep suitors at bay for quite some time," said Gandler, after Goldman's Ian Abbott last week took a similar view.

Deutsche Bank today downgraded Foster's to a hold given its expected improvement in the next 12 months is already reflected in its revised target price of $4.70 from $6.20.

Potential takeover action also remains for TWE but the high Australian dollar will see the company's underlying earnings in 2012 come in 15 per cent below peak levels, said UBS.

Goldman agreed the Australian dollar was the near term driver for TWE, with "significant" upside should it fall back below parity.

By early afternoon, TWE was 2.4 per cent higher at $3.44, while Foster's was 0.2 per cent higher at $4.54.

"Old" Foster's shareholders received one share in TWE for every three Foster's shares.