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Southcorp Turns the Tables on Australian Rival

After rejecting Foster's bid, takeover target makes its own offer to merge with its suitor's wine business

Daniel Sogg, Dana Nigro
Posted: March 9, 2005

Southcorp, the Australian wine giant that owns Penfolds and Rosemount, has come up with an unusual way to fend off an unwanted takeover bid. On Tuesday, it made a counteroffer to merge with the wine business of its suitor, Foster's Group of Australia, which owns Beringer Blass Wine Estates.

In January, publicly traded Foster's offered to purchase all of Southcorp for about A$3.1 billion (more than US$2.3 billion), or A$4.17 per share, in a deal that would create the world's third-largest wine marketer. (Foster's adjusted the share price to A$4.14 in February, after Southcorp decided to pay a dividend of 3 cents per share.)

Southcorp chairman Brian Finn has called the price "inadequate and opportunistic," and yesterday he again urged shareholders to reject Foster's bid. As a higher offer has not been forthcoming and no other serious buyers have emerged, Southcorp has put forth a new option: merge the two companies' wine operations.

Under the proposal, Southcorp, which is Australia's largest wine producer, would acquire Beringer Blass Wine Estates. In exchange, it would issue Foster's between 660 million and 775 million of its shares, valuing them at A$4.70 each. This means Foster's would retain its beer, spirits and nonalcoholic beverage businesses, while gaining a controlling interest in Southcorp of between 57 percent and 60 percent. In turn, Southcorp would still exist as a public company, giving its shareholders the chance to benefit from a turnaround in the wine business and profit from the anticipated merger synergies.

Combined, the two wine companies would have revenues of A$2.2 billion and would own 39,500 acres of vineyards and a stable of wines ranging from under-$5 supermarket lines to prestigious names such as Penfolds Grange. Southcorp also owns Australian brands such as Lindemans, Wynns and the Little Penguin. Foster's owns brands such as Wolf Blass, Greg Norman and Black Opal from Australia and Stag's Leap, Etude, Chateau Souverain, Chateau St. Jean and Meridian from California.

In support of its position, Southcorp cited a report by Sydney-based corporate valuation firm Lonergan Edwards and Associates Ltd. that assessed Southcorp's value at between A$4.57 to A$4.80 per share. The report further noted that the full value of Southcorp to Foster's, including 100 percent of synergies, at between A$5.84 to A$5.97 a share. "The Foster's bid…is neither fair nor reasonable," Finn wrote in a letter to Foster's chairman, Frank Swan.

Southcorp also announced on Tuesday the results of a poll it commissioned of 20,000 non-institutional investors, of which 85 percent said they would reject the Foster's bid. Finn added that their institutional investors, who hold about two-thirds of Southcorp shares, echoed that sentiment.

In response, Foster's issued a statement saying it would further consider Southcorp's proposal, even though it had rejected the idea during discussions in January, but that it remains convinced that its offer is the best option for shareholders in both companies.

Foster's has already arranged to acquire an 18.8 percent stake through a deal it struck in January with Southcorp's largest shareholders, the Oatley family, which founded Rosemount. Therefore, Foster's does not have to either raise its bid or accept Southcorp's proposal; it could choose instead to sit as a major Southcorp shareholder in Southcorp and try to seek board representation.

The initial period during which Southcorp could respond to Foster's offer was scheduled to close March 17, but Foster's has extended that to March 31. Meanwhile, the Australian Competition and Consumer Commission has announced that it will not intervene in the attempted acquisition.

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