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Foster’s Group told to justify demerger

The "under siege" board at Foster's Group must divulge the potential uplifts in profit to be achieved by separating its beer and wine businesses, in the expected formalisation of its demerger plans tomorrow, according to analysts.
The brewer is to tomorrow report its first-half results, with Citi tipping a 2 per cent fall in net profit after tax to $349 million, against the previous corresponding period and Macquarie expecting a slightly higher $350m.
But all eyes are on the expected unveiling of full terms - including a cost/benefit assessment - for its proposed demerger of its CUB beer unit and Treasury Wine Estates division into two listed entities.
Macquarie analyst Greg Dring said while the board has outlined some benefits, how each will make more profit being separated than combined “needs addressing”.
He said the “under siege” board was justifying a demerger on the basis the businesses are different, which isn’t a “compelling reason”.
“There is only one compelling reason to demerge and that is that the board is confident there will be bids for both…otherwise investors are going to be exposed to earnings dis-synergies and multiple contraction,” he said.
“We continue to believe a demerger is a bad idea.”
In late afternoon trade, Foster’s shares were up 3c at $5.76.
Mr Dring said the board should call for formal interest to test Foster’s internal views on valuation against market values before proceeding with the demerger, which Citi expects to cost up to $300m in one-off restructuring costs.
“If the interest isn’t there, sell the Californian wine assets and keep the company intact,” Mr Dring said.
On interest in the beer business, Mr Dring noted the “popular predators” are slowly ruling themselves out. Japanese giant Asahi last week reiterated it had no plans for a bid and Coca-Cola Amatil last year also said CUB is too expensive.
Despite previously dousing reports SABMiller could buy the beer unit, Credit Suisse analysts today changed their tune, saying “we are becoming increasingly of the view that SAB Miller may seek to acquire Foster’s”.
The Treasury business has had more formal interest, with Foster’s, helped by advice from Goldman Sachs and Gresham, in September turning down a bid from US private equity firm Cerberus Capital worth up to $2.7 billion.
But Mr Dring noted Constellation Brands’ recent sale of its wine business to private equity group Champ for an enterprise value of $290m, “highlights an absence of asset price tension for wine assets”.
On Deutsche Bank’s numbers, the beer unit is worth $10.6bn on a discounted cash-flow model, with wine between $3bn and $3.5bn using a through-the-cycle earnings valuation.

14 Feb. 2011

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