Foster's Group, Australia's largest brewer, pushed ahead on Tuesday with plans to split its beer and wine businesses, but it risked dampening bidder appetite for either unit by also reporting soft first-half profits.
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The move could elicit interest from the likes of world No.2 brewer SABMiller for Foster's $10 billion beer unit -- one of the last prizes in a globally consolidating beer market.
Foster's said the split, to be completed in May, would help each business pursue its own strategy after efforts to jointly market the two failed.
"As they do the demerger, it promotes the possibility of them becoming a target but the earnings will leave them looking somewhat vulnerable," said Angus Gluskie, portfolio manager at White Funds, which is a shareholder in the company.
"An acquirer has to be comfortable that there are some structural declines in that industry, primarily the traditional beer brands are really struggling to maintain their place in the market," he said.
The wine spin-off marks the end of a decade-long expansion, in which Foster's had spent around A$6 billion building its portfolio buying Southcorp and Beringer to create the world's second-largest wine company.
It then wrote down its value by half, or nearly A$3 billion, as the global wine glut, a tough market and surging Australian dollar slashed profits.
The beer and wine units are expected to attract interest from trade buyers and private equity firms after they are separately listed on the Australian Stock Exchange.
Foster's has already rejected one formal bid for the wine business, which owns vineyards from California's Napa Valley to the Hunter Valley near Sydney and labels including Beringer, Penfolds and Wolf Blass. That offer, from unnamed private equity bidders, was worth $2.5 billion.
BEER DEMAND DECLINES
Australia's beer market has declined in recent years, as consumers turn to wine and premixed drinks. Government statistics showed that Australians drank an average of 107 litres of beer in 2009, the lowest reading since 1947.
Foster's, which has been brewing its flagship brand since the 1880s, said it estimated the country's total beer market declined 7% in the six months to December, hit by one of the wettest and coolest summers in decades.
"Our financial results have not been as we would like them," Chief Executive Ian Johnston told an analyst briefing. But he said the beer unit, Carlton & United Breweries (CUB), had increased its Australian beer market share, as its volumes fell 5.8%, less than the sector's overall decline.
In the current half, beer volumes are expected to decline 3-4%. CUB has a market share of around 50%, ahead of main rival Lion Nathan with about 42% and various small craft beers.
Johnston, who will depart after the split following two years at the helm, said he never intended to put the company up for sale, but any offer would be considered "on its merits".
Before one-off items, total first-half profit fell 5.6% to A$335.7 million, below analyst forecasts for A$349 million.
Consumer spending in Australia has been surprisingly subdued in recent months, with confidence under pressure from higher interest rates and retail sales weak across the board
Foster's stock fell 1.4% as investors focused on the disappointing beer results, before recovering to finish steady. The broader market was off 0.1%.
At Treasury Wine Estates, first-half earnings were steady despite a 5.9% fall in volumes, as the company focused on its premium brands.
Foster's shareholders will receive one share in the new wine company for every three shares currently held.
Treasury Wine Estates will be listed on the Australian Stock Exchange in May, subject to a shareholder vote in April, a year after the idea was first mooted. Costs of the split-off of some A$151 million would be borne by Foster's.
Wine is valued at A$3.1 billion on Foster's books, or about half what the company spent on wine acquisitions in a rapid expansion as it sought to offset flat demand for beer. Treasury ranks behind Constellation Brands as the world's second-largest wine company.
WAITING IN THE WINGS?
Some analysts say suitors may wait for an improvement in prospects for beer before making any move.
"The beer business is more attractive because everyone in wine is struggling," said Ausbil Dexia Chief Executive Paul Xiradis. "The volumes there are a bit weak and likely to remain a bit weak, so any potential buyer may want to see some improvement," he said.
Last month, a report that SABMiller may be clear to bid for Foster's $10 billion beer business alone and without its Australian partner Coca-Cola Amatil sent the Australian brewer's shares up 4%.
SABMiller distributes its Peroni, Miller and other brands in Australia through its venture with CC-Amatil, while it owns the Foster's brand in India and has the U.S. brewing rights.
A SABMiller spokeswoman declined to comment, but analysts see the brewer as the clear favourite as other big brewers like Anheuser-Busch InBev, Heineken and Carlsberg have big debts after recent acquisitions.
Another potential suitor, Japan's Asahi Breweries, ruled itself out of the running last week, saying it has no interest in buying any part of Foster's because the assets looked expensive and the market was tough.
American brewer MolsonCoors (NYSE:TAP) unwound its derivative position representing a potential 5% interest in Foster's in January and analysts say it does not have the firepower for a big beer bid.
Private equity firms have shown fresh interest in wine of late, with one of Australia's largest buyout firms CHAMP buying 80% of Constellation's local wine business in December.