May 21, 2005

Eric Ellis

FROM DOWN UNDER TO ON TOP — FOSTER’S BIG BET ON WINE

FOSTER’S MAY BE AUSTRALIAN FOR beer, as the ads would have it, but CEO Trevor O’Hoy is intent on making the company Australian for wine

A $4 billion spending spree since 2001 has seen Foster’s emerge as the world’s biggest premium winemaker. Now a $2.5 billion takeover of Australia’s Southcorp, completed in mid-May, promises to transform Foster’s into the world’s largest wine company, with $2.2 billion in global wine sales, more than the company makes on beer.

 “Beer is the engine room of our business plan,” says O’Hoy, quaffing a Carlton Draught, a Foster’s brew, at the company’s Melbourne headquarters. “But wine is where we see a lot of growth, particularly in Asia.”

The 49-year-old O’Hoy, just a year into the top job at Foster’s, inherited a wine division that saw sales drop 18% last year and profits fall by 8%. His marriage of Foster’s financial muscle with Southcorp’s reputation as a top winemaker—it owns the Penfolds, Lindemans, and Rosemount labels—is an attempt to fix that. He calls Southcorp “a near perfect strategic fit for our group.”

The market doesn’t see it that way. Most analysts regarded O’Hoy’s initial bid for Southcorp as expensive, and he had to raise the offer price in late April to persuade shareholders to accept the deal. Meanwhile, Foster’s shares were punished during the five-month takeover campaign.

Now that he has won the prize, O’Hoy faces another problem: Foster’s could become Australian for takeover. The global alcohol business is going through a wave of consolidation— Anglo-Spanish drinks giant Allied Domecq is the latest object of corporate desire—and Foster’s could itself become a target.

Britain’s Diageo, the world’s largest alcoholic beverages group, has been touted as a possible buyer. Diageo wouldn’t comment, but CEO Paul Walsh has made it clear he wants to expand the group’s wine interests. “Southcorp has some very good brands,” says Damien Klassen, an analyst at Aegis Securities in Sydney, “and a foreign buyer [of Foster’s] could effectively pick them up for free.”

Founded by American emigrants to Australia in 1888, Foster’s has long been regarded as vulnerable to takeover. It lacks a dominant major shareholder, and regulatory reforms have turned Australia into one of the world’s more open corporate playing fields. A foreign takeover of Foster’s might not be popular among Aussies, but it may be unavoidable.

The stock has hardly been a stellar performer since O’Hoy became CEO in April 2004. Group sales in the six months ended Dec. 30 were down 16%, to $2.5 billion, while profits were off 1%, to $588 million. And the company has taken on $4 billion in debt to finance its acquisitions.

O’Hoy, who has been at Foster’s for 30 years, seems sanguine about the prospect of a takeover: “If we are well run, shareholders will think we’re doing a good job and back us. And that’s about the best defense you can have.” O’Hoy stresses the quality of Foster’s wine labels—among them California’s Beringer and Australia’s Wolf Blass—but he’s equally enthusiastic about the what the industry calls “critter brands,” named for the animal themes prominent in their marketing. In O’Hoy’s menagerie now are such new labels as the Little Penguin and Half Mile Creek, designed to compete with Yellowtail, rival Casella’s popular brand.

Still, Foster’s tilt to wine is partly an admission that it has few places to go with its beer brands. The company has a commanding market share in Australia, one of the world’s biggest per capita beer markets, but brewing giants Anheuser- Busch, InBev, and SABMiller have carved up much of the global market and are too big for Foster’s to challenge outside its home patch.

O’Hoy insists he didn’t overpay for Southcorp, but he acknowledges the deal could make or break Foster’s. Analysts agree. They say O’Hoy has about two years to make the Southcorp deal pay off. If that doesn’t happen, the wine business could turn out to be a poisoned chalice.