Foster's foreign adventure
More of that later, but first to look at the company's result. During 2000, Foster's increased sales by 13% to $3.17bn, which led to profit growth of 17.6% to $431.2m – good numbers in anyone's language. And they need to be. Foster's is paying $2bn for Beringer, which translates into $US55.75 ($A97.12) per share. That's a healthy 23.72% premium on the closing price for the vigneron's shares the day prior to the announcement and values the stock at a multiple of 19.2 times earnings.
Benefits of positioning
There is a general feeling that the company paid too much for the asset - although no one's doubting that the Napa Valley property is at the top end of the market. This positioning has its benefits. Americans are prepared to pay top dollar for a bottle of wine from this region in California and comparable companies in the States, such as Seagram's or Diego, are trading at higher multiples than the Beringer offer price implies.
Investors' other concern is that Foster's, in issuing billions of dollars of new equity to institutional investors, is watering down earnings per share. That's true, but the company has had to issue only $560m in debt to finance the deal, which leaves its balance sheet looking good. Besides, there is nothing wrong with paying a high price if you're getting value.
Beringer represents a decent toehold in the American wine market. The Yanks drink far less wine per head of population than Australians (not to mention the French or the Italians). That implies room for growth. We think that wine consumption is likely to creep up over time in the US, but not to the extent that they'll catch up with us or the Europeans.
The other likely trend is that the highly fragmented US wine industry will consolidate under the mantle of a few big producers and Foster's is buying a prime seat at that particular craps game.
Back home, the company announced in late July that it's beefing up its presence in the Hunter Valley, in New South Wales, by taking a 50% stake in the boutique winery Briar Ridge Vineyards. The company's focus on wine is commendable – it's an industry that enjoys better growth and higher margins than beer, as well as a far greater capacity to build global brand names and Foster's can now use established Beringer labels to piggyback its Mildara Blass brands into the US.
Foster's is Australia's premier brewer. It faces competition at home from Lion Nathan, but this acquisition will assist the company in growing into a global company with truly international brands, particularly in wine. Subscribers can ACCUMULATE, especially if the price stays depressed (that is below $4.20) on fears that the company paid too much for Beringer.