Call To Break Up Foster's

Sydney Morning Herald

Saturday August 9, 2008

Scott Rochfort

ONE of the most outspoken critics of the disastrous foray into the wine sector by Foster's has warned the company may have to break up its wine portfolio because it is "too big and too complex", and separate it from its successful beer business.

David Errington, an analyst at Merrill Lynch, said in a note to clients that the decade-long expansion by Foster's, which made it the world's second largest wine company, had put it at a disadvantage compared with other winemakers.

"We believe that the cost advantages through larger operating facilities and higher volumes through distribution (if there are any benefits) are more than offset by the damage caused from the brand cannibalisation [and the] commoditisation of premium products," Mr Errington said.

"Breaking the [wine] business up could be a solution but ... is likely to come at a fairly hefty cost," he warned.

Separating the beer and wine businesses alone could cost about $100 million, Mr Errington said. "We see this move as being critical if Foster's as a company is to progress and reach its full potential," said Mr Errington, who has been a long-time critic of the group's $7 billion foray into wine.

The chairman of Foster's, David Crawford, said in June, when the company announced a $700 million writedown, that it had paid too much for its wine assets.

Mr Errington also raised concerns over the independence of a strategic review of the wine assets, which is being overseen by Mr Crawford.

"We are concerned that the review lacks the independent perspective that is needed to critically assess the wine business and position Foster's in the future."

One concern is that Mr Crawford was a director at the time the board, more so than management, pushed for the $3.8 billion acquisition of Southcorp.

Foster's brushed off Mr Errington's concerns.

"The review has and will continue to consider independent advice as appropriate," a company spokesman said.

"It's entirely appropriate that the chairman and the board of Foster's take a direct interest in the review."

Foster's is expected to update the market on its wine review when its annual results are announced in Melbourne on August 26.

The company is expected to complete the review later in the year, when it is due to announce a replacement for the former chief executive Trevor O'Hoy, who quit in June. The acting chief executive, Ian Johnston, is a likely candidate for the job.

© 2008 Sydney Morning Herald

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