Australian Wine Rivals Start Getting Friendly

Foster's pays more than $440 million for 19 percent stake in Southcorp; further talks are under way

Tim Fish
Posted: January 14, 2005

Two Australian wine giants--Southcorp and Foster's Group, which owns Beringer Blass Wine Estates--may be joining forces. Late this week, Foster's paid AU$584 million (US$443 million) for a nearly 19 percent stake in Southcorp, a bombshell that has investors Down Under speculating that Foster's is making a play for its chief rival.

Both companies are publicly held and, on Thursday, requested a halt to trading in their shares on the Australian Stock Exchange. Southcorp and Foster's both declined comment, but the two are reportedly in talks and an announcement could come as early as Monday.

If Foster's and Southcorp were to merge, they would create the third-largest wine marketer in the world, behind Constellation Brands and E.&J. Gallo, respectively, with an estimated 40 million cases sold in 2004, according to Impact Databank research. Alternately, Foster's could have acquired the 18.8 percent stake primarily to fend off foreign bidders and keep its future options open.

Foster's paid AU$4.17 (US$3.16) a share for the stake held by the Oatley family, the largest shareholders in Southcorp and the founders of Rosemount Estates, which Southcorp acquired in 2001. As part of the move, Robert Oatley and his son A.G. Oatley resigned from Southcorp's board of directors.

Southcorp had been facing financial problems in recent years, though a turnaround has been underway. It has been rumored to be the target of potential takeovers by other major international beverage firms; among those that might be interested are U.K. drinks giants Allied Domecq and Diageo (which in December made a deal to acquire California's Chalone Wine Group) and French firm Pernod Ricard, which owns Australia's Orlando Wyndham group, producer of the Jacob's Creek label. The Oatleys were reportedly adamant that the company should stay in Australian hands.

Foster's, which hired a new CEO last year, has also seen disappointing earnings from its wine division. Last year, Beringer Blass made changes in its management in January and June.

Although 18.8 percent of Southcorp's stock is hardly a majority, Foster's is now in the power seat and can veto other sales. Australian law requires that bidders line up at least 90 percent of a target company's shares before it can acquire the whole.

Southcorp, whose brands include Penfolds, Lindemans, Rosemount and Little Penguin, is the world's eighth-largest wine marketer, with estimated sales of 21 million cases in 2004, according to Impact Databank.

Foster's is in 11th place internationally, with 19 million cases sold in 2004. Its Beringer Blass division encompasses wineries in Australia, California, Italy and New Zealand, including brands such as Beringer, Chateau St. Jean, Etude, Greg Norman, Meridian, Stags' Leap and Wolf Blass.