THE DISTILLERY: No small beer

Cerberus was the three headed dog that guarded the gates of Hades in Greek mythology, which sounds a lot like the morning after the night before drinking some of Foster's best and worst products. Cerberus is also said to be the private equity group bidding for Fosters' wine business. In recent times, Cerberus has had a hangover or two that the columnists didn't tell us about this morning. It hasn't had the most stellar of track records in recent years. Cerberus is the group that couldn't run car maker Chrysler or GMAC, General Motors' old finance arm. It lost control of both because of poor management, especially at the finance arm which got into sub-prime home lending. Chrysler was picked up by Fiat after the US government took it over, GMAC needed billions in US government support during the GFC because of massive losses. All Cerberus did was to show that private equity is no better or no worse than the likes of Goldman Sachs, Merrill Lynch and Citigroup at losing investors' money. So we should keep that in mind as we assess the approach to Foster's for its wine business. 
 
Terry McCrann got it spot on this morning; it's 'time' at Foster's, not for last drinks, but for the entire group: "So, it's now all but official. We are going to lose ownership of not just our – still – best-loved tipple, but also our best one. Not only is VB and its fellow Carlton beers going to pass into foreign ownership, so also is Grange. Penfolds Grange. Now Foster's Group (FGL) chairman David Crawford didn't get one of those offers of Frank Sinatra and The Godfather fame. In fact he got one that was the exact opposite; an offer he had to and was always going to refuse. But in the process, the offer and refusal, will act like the auctioneer coming back out of the house to announce that the property is now on the market." The beer business will cost upwards of $12 billion, and it's hard to see a private equity group getting that up in the current market conditions.
 
Liz Knight from the Sydney Morning Herald wrote: "it is fortuitous for Foster's that its open and informative stance coincided with its desire to let the investment community know that at least one party is interested in buying its underperforming wine business. As far as we know Foster's has not officially put the wine business up for sale. But it's fair to say that an acceptable offer at any time over the past few years would have been warmly welcomed. The fact that Foster's is now working towards the demerger of the wine and beer businesses is evidence that no one has been particularly interested in buying the wine business until now."
 
Matthew Stevens in The Australian said: "Private equity's brazen attempt to syphon value from Foster's shareholders has quite properly been rejected by chairman and board... given we are at a low point in the broader market cycle and at the starting point of a so-far successful redesign of the Foster's wine business, there is quite a bit of upside in the wine business and the offer that Crawford has rejected would indicate that private equity, at least, knows it." 
 
Malcolm Maiden said yesterday: "The offer of $2.3 billion to $2.7 billion for Foster's wine division that Foster's board this morning announced had been rejected came in yesterday after the close of trading. It is on the light side, and Foster's board was right to reject it. Wine was considered the problem child in Foster's. Now it's in demand, and the odds on either a full bid for Foster's or bids for the two big divisions ahead of the formal breakup have shortened." 

John Durie in The Australian went the football analogy in his first comment yesterday: "Fosters' chairman David Crawford has received the offer he was hoping for to kick-off an auction for the company. Not surprisingly, Crawford rejected the unnamed private equity bid as too low. For Crawford the good news is the value in the company has been underlined and so early in the auction process he can reject offers below book value with relative ease without attracting shareholder protests." This morning Durie says a US buyout group is behind the offer: "Cerberus Capital is prepared to buy his wine assets and in the process has opened the way for a beer battle. Crawford's thinking was that it's better to get on the front foot than go through the pain of another write down and then seek shareholder support for more time. The division is now in the books at $3.1 billion – or some $4.9 billion less than the company paid for the assets. That, on any score, is a corporate debacle and a chapter well closed by Crawford." 

And Stephen Bartholomeusz in Business Spectator said: "The board of Foster's Group won't be displeased that private equity has come knocking and seeking to acquire, not the 'good' part of its proposed demerger but the perceived poison pill. While most of the speculation of a pre-demerger approach has centred on Foster's beer business, the first formal approach it has had has been for the much-maligned wine business, the re-badged Treasury Wines Estates." Chanticleer in the AFR agrees saying the bid "will provide the company's board with considerable reassurance that it is doing the right thing for shareholders by proceeding with a demerger of its beer and wine businesses.

With no announcement yesterday from Leighton, Fairfax's Ian Verrender says it's only a matter of time before the change at the top happens, but that won't resolve the underlying tensions: "The skirmish for the crown may have ended, but the battle for control of Leighton is unlikely to be at an end. It is likely that Stewart, the chief executive-in-waiting, will be more amenable to the wishes of the company's main shareholder, although it is understood the independent directors are uneasy about a non-cash merger with Hochtief for obvious reasons. But Leighton's ownership structure is inherently unstable." And Chanticleer, in the AFR (inside the profits wrap-around) says the actual announcement of the change at the top must wait until "the terms of a final deal with King" is done.

The Australian Financial Review looks at the profit reporting season just ended and says: "The resources boom and a defiant local economy helped Australia's top companies declare profits of almost $60 billion this reporting season... Retail super funds received the lowest amount of money in the June quarter for 12 years as sharp falls in equity markets and regulatory uncertainty spooked investors." Gee, gun-shy retail investors, who would have thought that? It must be the disease affecting sharemarket trading in the US and UK. Retail investors there are disenchanted with equities and are looking at bonds and other investments. 

And looking tomorrow's subject matter today: The ACCC will let us know in a few hours time if it will let the National Australian Bank buy control of AXA Asia Pacific Holdings, split it up and take control of the local business. Hopefully that will end the deal. It's been 10 months since negotiations started.