The beer hunter

Southcorp, the struggling Australian wine producer, has rejected a A$4.17 a share take over offer from Foster’s, the brewer and wine maker, which values the company at A$3.1 billion ($2.35 billion) as “inadequate and opportunistic.” The market seems to agree having bid up Southcorp’s shares as high as A$4.50.

Has everyone had a little too much Shiraz?!?

Southcorp’s main brands have not been doing well as they have struggled to successfully integrate Rosemount since acquiring it in 2001 and resorted to in-store discounts to move that and some of its other brands. Now they expect multiple bidders?

There are only three other companies that could really be interested: Constellation (US), Diageo (UK), and Allied Domecq (UK). Constellation is unlikely to make a bid. Having already bought BRL Hardy–when the US dollar was much stronger–they already have good exposure to Australia. Further, they just gobbled up Robert Mondavi for $1.36 billion. Better to digest that one first.

Diageo could pay above the Foster’s bid. Formed by the merger of Grand Metropolitan and Guinness, the transaction size would not be big for this maker and distributor of wine, beer, and spirits with nearly $20 billion in annual sales. But given their global reach, would they want to hunt the wounded beast that is Southcorp? Certainly they did trump other bidders in their acquisition of Chalone last month.

Allied Domecq is probably the most likely rival to Foster’s. Their diverse holdings include Maker’s Mark bourbon as well as Dunkin’ Donuts and Baskin Robbins. So with wine in growth mode, if management wanted to add more wine to their portfolio, this is a big opportunity for them to do so. The currency is not such a negative factor as it would be for say Constellation since Allied Domecq is a UK company.

But many investment analysts say that Foster’s bid is a “mistake” and shares of Foster’s have traded down 10% on the news. Citigroup analyst Dawn Oldham in Melbourne values Southcorp at $2.90 a share. Further, a Foster’s acquisition would cannibalize sales of Foster’s existing Australian brands she says.

So the white knight that Southcorp’s chairman Brian Finn and the markets are anticipating may not arrive. The other big players may bet that Foster’s will drown in its own Shiraz.

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