The Southcorp Chickens Come Home to Roost (10 June)

 

When Fosters bought Southcorp, history was destined to repeat itself.

 

Southcorp paid far too much for the assets when they purchased Rosemont. To make matters worse, when they integrated the two companies, they did a bloody awful job of it. The destruction of the, up until that time, very profitable Rosemont brand was just the start of their woes. Keith Lambert, the person appointed as CEO of the new combined operation didn't exactly do a great job running the shop. Excess inventory became a huge problem. Market share was lost, especially in the UK. The management systems were in a complete mess. The write-offs became huge - $923 million worth, and the share price plummeted to (at that time) record lows. During this time, the Chairman of the Board changed and Keith Lambert was removed and replaced by John Ballard.

 

At that time, the new Chairman of the Board, Brian Finn said, “Southcorp’s problems, in my view, are not to do with wine, winemaking or our basic technologies; they are to do with the way we have been running our business.”

 

In the first half of 2005, I wrote an article called The Pepsi-fication of Penfold. In that article, amongst other things, I stated:

“Now we have a situation where the same two players are about to repeat history and I have no reason to believe this takeover will go anything other than badly. In fact, if Foster's share price was totally dependent on the wine business, I would be willing to bet that over the next two years the price would drop.”

 

I then went on to state:

“So who will be the winners and who will be the losers?

 

In the short term, I can't see many winners, (except possible drinkers of low-end wines and maybe bargain-hunters as inventory is quit post-merger,) however, in the long term the economies of scale will pay dividends for Fosters.

 

The list of potential losers is lengthy.

 

* There is likely to be an initial loss of market share

* Loss of employment opportunities and jobs

* Loss of experienced winemaking talent that will wind up on the scrap heap (or may wind up bolstering the competition)

* Deletion of many brands

* Downgrading of quality and product realignments

* Further concentration at the top end which will provide growers with even more grief

* Increased power will make it more difficult for smaller players to get retail shelf space

 

There will be difficult times ahead for both Fosters wine division and the industry as a whole as a result of this takeover.”

 

Today, some significant announcements were made by the chairman of the board, David Crawford.

Firstly, the CEO, Trevor O’Hoy is leaving. Is this history repeating itself like the Lambert situation? You betcha!

 

Secondly, earnings per share growth is expected to be between 5% and 7%, which is below the previous guidance of approximately 10% growth. According to the press release, “In the second half, business performance has been impacted by continuing disappointing results from wine in the Americas and slower revenue growth in Australia.”

 

A drop in earnings often leads to a drop in the share price. Will it happen here? I don't know, only time will tell, but if it does, it won't be surprising.

 

The release also goes on to state Fosters expects to report a pre-tax write-off of between $600 million and $700 million in the value of its global wine assets. It later goes on to say, “Foster’s also expects to report a $70 million ($49 million after tax) non-cash write down to surplus Australian bulk wine inventories."

 

A write-off of wine inventory and wine assets. Now that sounds very familiar. When did I last hear that one? Does the name Southcorp ring a bell to anyone?

 

So why has this happened? In David Crawford's own words, “The reality is we did not execute the Southcorp integration as well as we expected and operating conditions are now more challenging.  We must also recognise and acknowledge that we paid too much to acquire wine assets.”

 

As I have said previously, the plan was flawed from the start. It may, and I stress may be all very well and good to ship wine on the same tracks as beer, and although wine is also a beverage, it is different. A difference that Foster's completely did not recognise, and to a certain extent, probably still doesn't. When Fosters announced that they would only have one sales force, and guys that had previously been selling beer would now be selling the entire portfolio including wine, I predicted it would be a recipe for disaster. It didn't take terribly long for Foster's to realise the horrific nature of this strategy. Unfortunately by then, a lot of the damage had been done.

 

When Southcorp first announced their write-downs, it was round one. Given the amount that Foster's paid for Southcorp, one can only wonder if these write-downs are also round one? Once again, time will tell… but in this game of vinous write-off roulette, I will bet on red coming up.

 

Feel free to submit your comments!

From Ian Hickman: Tuesday 24 June

There was one winner out of this whole farce - the Oatley family who ended up being paid out in cash by Fosters and didn't lose one cent out of the original Southcorp deal, despite Keith Lambert's disasterous decisions as CEO which played a key part in running down the share price. I bet there are a lot of Southcorp/Fosters shareholders and former employees who secretly hope their super-maxi breaks in two and sinks in Bass Strait every Sydney-Hobart race. Ian.

 

Copyright © Ric Einstein 2008