Foster's Develops A Plonk Problem

Sydney Morning Herald

Wednesday May 21, 2008

Edited by Jamie Freed

Making money from wine is proving tough for the beer giant.

COME August, Foster's chief executive Trevor O'Hoy may regret a particularly notorious outburst. Back in August 2006, he famously advised the Merrill Lynch analyst David Errington to "take a holiday, find yourself a therapist and come back and analyse [Foster's sales] in 2008" after tiring of the constant stream of negative notes.

Errington has taken another look - particularly at the US wine operations - and what he's found is not exactly flash.

After investing more than $US3 billion ($3.12 billion) building up its California-based wine business, Errington has predicted Foster's return from the business will slump this financial year to about $US170 million before interest and tax. This counters O'Hoy's assurances that the wine businesses will be humming by June 30.

Errington reckons the US wine business this year will return a paltry 5.8 per cent on invested capital and is underperforming relative to its competition.

Errington has long criticised Foster's "multi-beverage" strategy of trying to morph its beer, liquor and wine sales and distribution into one stream. And he doubts the US business will "ever generate an acceptable return". "There is no doubt in our minds that Foster's paid too much for its wine assets.

"Paying $7 billion for assets that are currently struggling to generate $450 million of EBIT strongly supports our claim," Errington said.

Unless Foster's shows an improvement in its full-year results this August, O'Hoy is expected to come under pressure to resign.

State of Origin

Britain's BG Group clearly wasn't exaggerating when it claimed to have done extensive legwork before launching its $12.9 billion cash bid for Origin Energy. A complicating factor in the bid is the fate of Origin's 51 per cent stake in New Zealand's Contact Energy - particularly because BG is more interested in Origin's Australian assets.

But it appears BG has already lined up a preferred buyer for the Contact stake, in a move that would allow it to avoid making a required bid for the rest of the New Zealand company. Wellington's Dominion Post has reported numerous potential buyers were canvassed before a favourite was selected. It added there was already a proposed sale timeline.

Presumably, BG would sell the $NZ2.6 billion ($4.83 billion) stake within a month of its Origin bid becoming unconditional, since the New Zealand Takeovers Panel last week ruled the British company would not have to bid for Contact if it held less than 20 per cent of the company. Then the stake's purchaser would make a full bid for Contact.

Of course, this all remains academic, since Origin has yet to decide if it will accept the agreed scheme of arrangement put forward by BG. The Post added that a market float of the majority stake in New Zealand's second largest company had not been ruled out. Possibly that's because it remains unclear whether the Government would approve the full foreign ownership of Contact.

Just the ticket

For better or worse, ERG shareholders may soon see their shares in the trouble-prone transport ticketing provider resume trading for the first time since January. ERG and the Australian Securities Exchange are understood to be close to signing off the updated financial information which is a precursor to the trading suspension being lifted.

ERG is being asked to provide an update of the company's financial position as a fair bit has happened this year. This includes ERG losing its TCard contract with the NSW Government, which triggered tit-for-tat lawsuits and a bailout by ERG's largest shareholder, Duncan Saville. ERG shares last traded at 4.5c.

Test of strength

The sharemarket's resilience is expected to be tested in coming weeks as a series of capital raisings suck up to $10.5 billion out of the market, according to Goldman Sachs JBWere.

The Telstra T3 instalment is falling due and is expected to account for $6.6 billion, while Wesfarmers' recent capital raising is expected to suck in another $1.8 billion. On top of this there are dividend reinvestment plans from ANZ and NAB, which could drag in more than $2 billion between them.

With so much supply hitting the market "the banks are vulnerable, especially if hedgies use this larger-than-expected selling to come in and short the banks again," said the institutional sales and trading director, Richard Coppleson.

This could test the whole market, with end-of-financial-year spending also starting to kick in and not a lot of spare cash coming in from dividends.

Safe bet

An annual review of US casinos by the lobby group for some of America's top gambling companies shows why James Packer's Crown Ltd chose to buy a little-known racetrack-casino in Pennsylvania late last year.

An American Gaming Association survey said that Crown's Meadows "racino" belongs to the fastest growing segment in the industry, with racino revenue soaring by more than 45 per cent to $US5.2 billion ($5.14 billion) in 2007. The Meadows has more than 1817 poker machines and this is expected to grow to 3000 when a new development is opened next year.

At the time of the deal in November last year, analysts said they were concerned because the Meadows was only partially complete and Crown had too many projects under development.

In April, punters at the Meadows wagered $US244 million - $US4 million less than in March - although overall wagering across the state's racinos was also down.

© 2008 Sydney Morning Herald

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