As the financial wonks pore over the planned Foster's takeover of Southcorp, issuing reams of analyses speaking of the "synergistic benefits" and worrying over whether $2.5 billion is too high or too low a price, the question no one seems to be asking is what the merger of the two Australian giants might mean for the wines and for wine drinkers.
The new company, which would bring icon brands such as Australia's Penfolds and California's Beringer under the same umbrella, would have estimated wine sales of around 40 million cases a year, according to Impact Databank. That could make it the third-largest wine marketer in the world, after Constellation Brands (which owns one of the four biggest Australian wine companies, BRL Hardy) and E. & J. Gallo--depending on whether Pernod Ricard succeeds with its attempted takeover of Allied Domecq or is beat out by another bidder.
The takeover, which was initiated in January and originally rejected, is a long way from a done deal. Although five of Southcorp's seven board members voted to accept the revised Foster's bid of $4.26 (US$3.33) per share, CEO John Ballard sent a dissenting letter on May 2 outlining reasons he thinks the Foster's offer is low. At that point, less than 40 percent of the shares had actually been acquired. Analysts think Foster's will get enough of the big institutional shareholders to reach a controlling interest of 50.1 percent, but it will be a long, hard slog to get to the 90 percent level required by Australian law for a takeover.
Meanwhile, the 2005 harvest is already in tanks and barrels, having been completed in April. So any major changes to either company's wines will likely happen in coming years, as Chris Hatcher, chief winemaker for Beringer Blass in Australia, said he had not yet had any discussions with his Southcorp counterparts about how the companies' various vineyards, winery facilities and wine brands would be sorted out. "It's all been happening at the boardroom level," he said.
Both parties in the deal have been steadily collecting wineries and wine labels for more than a decade. Beringer Blass, the wine division of the company that made its fortune on the Australian beer Foster's, started out as Wolf Blass winery in Australia, which merged with Mildara Wines in 1991 to become Mildara Blass, then folded in California-based Beringer Wine Estates--itself a portfolio of familiar names--in 2000.
Today, the Beringer Blass stable includes such thoroughbreds as the two title wineries, the well-known California names of Chateau St. Jean and St. Clement and value brands such as Black Opal.
Southcorp started out as a brewer, but got out of that business and others it had acquired (including appliances) when it built a wine empire by buying big names such as Penfolds and Lindemans and boutique wineries such as Devil's Lair and Coldstream Hills. It was the dominant wine company in Australia when it bought out family-owned Rosemount in 2001 and, hoping that Rosemount's success in the United States would work for Southcorp, essentially put the Rosemount management team in charge.
That strategy did not work out so well. Southcorp's share price dropped precipitously. In an enterprise as complex as a global wine company, it's hard to pinpoint just what went wrong. The conventional wisdom is that the Rosemount team erred in concentrating on discount pricing, failed to anticipate downturns in sales and made way too much low-priced wine. Plus, the company also got caught holding the bag on a big contract with a U.K. supermarket chain that went sour. Key members of the Rosemount team, including CEO Keith Lambert and chief winemaker Philip Shaw, are now gone.
There are signs that the new regime, led by Ballard, was righting the ship. Southcorp's new entry-level brand, The Little Penguin, is a critical success, and the high-end bottlings, such as the venerable Penfolds wines, taste as good as ever. Lindemans has had success as a value brand, and Wynns is in the process of seriously revamping itself.
This unsettled state explains why investment analysts sound skeptical about the price Foster's is paying. But from a wine-production standpoint, Southcorp's assets include 20,000 acres of vineyards, among them some of the most prized in Australia. And its wine labels have strong identities, even if--in the case of Lindemans, Wynns and Rosemount--quality has been uneven.
Beringer Blass and Southcorp have been going head to head in the marketplace. Wolf Blass woos the same wine drinkers as Penfolds. Rosemount's diamond-label series competes with Black Opal.
Additionally, both companies have big winemaking facilities to process high-volume wines in Australia's warm interior territories. When Beringer Blass built its state-of-the-art winemaking facility in Barossa Valley a few kilometers north of Southcorp's big winery, local wags called it "Northcorp."
Would it make sense to expand one and close the other? As this merger shakes out, the thorny issue could be duplication, not only of brands but of facilities such as these.
What will happen as Beringer Blass takes stewardship of icon wines such as Penfolds Grange and Bin 707? To emphasize the quality at Penfolds, its winemaking team recently moved back to Magill Estate, the winery's original home before it became part of a conglomerate. Will Foster's leave it there? Will it keep Peter Gago as winemaker, only the fourth in Penfolds' history?
"I imagine that we would keep things like Penfolds pretty much as they are," Hatcher said. He added that he could not bring himself to change the wines adversely. "They are jewels in Australia's crown." But will the corporate honchos feel the same way?
As "Northcorp" absorbs Southcorp, those are the kinds of questions wine drinkers will be waiting to answer.
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