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Foster’s - global leadership in premium wines?

On 26 May, Foster’s Group Limited announced it had reached a relevant interest in 91% of the shares of Southcorp Limited, clearing the way to commence compulsory acquisition of the remaining shares.

The outcome is clear cut – Foster’s and Southcorp are now one — creating the opportunity to complete what the acquirer, Fosters, expects to become "the world's leading premium wine company — and the only Australian consumer goods company to achieve global category leadership — as well as Australia's leading multi-beverage business."

"We are proud to lead the further growth and development of an unrivalled portfolio of premium beverage brands," the announcement under the signature of Trevor O'Hoy, president and chief executive of Foster’s, read.

Aside from creating the vehicle capable of leading the promotion of "Brand Australia" globally "and significantly enhancing the future growth of the Australian wine industry" the combined business will have both an outstanding portfolio of premium wine brands, significant viticultural and winemaking infrastructure and a combined annual sales volume of about $A2.6 billion.

O'Hoy further advised that the immediate challenge and priority is to stabilise and grow the Southcorp brand portfolio "and ensure business continuity throughout the integration process."

"We will seek to bring together the best of both businesses by taking a measured and inclusive approach and upholding the principles of dignity and respect.

"This will take place only after Foster's has undertaken a detailed review of Southcorp's business in each market, a process estimated to take two months and to be undertaken by a team of people from both companies."

More than 80% of the integration process will occur in Australia with a primary focus on integrating back office and support functions short term, with the Southcorp marketing team remaining intact and separate until after the key Christmas 2005 trading period.

Fosters has also announced a number of changes to its executive management responsibilities, creating a new management structure from July 1.

The announcement did not touch on the minutiae of the takeover. For instance, the likely impacts at the individual vineyard or contracted grower level.

Fosters’ spokesman, Matt Schmidt, told me previously that the business review process will enable an understanding to be developed of the Southcorp business and the supply-demand status, a process which is expected to take some time, stating: “We (Foster’s) are committed to sustainable relationships with growers and the transparency which will be vital to this.”

However Schmidt noted that over-supply is the industry's Achilles heel.

"We recognise that growers are looking for reliable long-term forecasts so they can plan.

"The key challenge is improving demand forecasts — all premium branded wine companies are grappling with this issue.

"Cyclical excesses hurt premium branded wine companies as well as growers and the business review process will enable us to understand the economics of the Southcorp model and its supply-demand status

"If we do decide to introduce some level of outsourcing, total required fruit volumes should not change, provided Southcorp is not currently overcommitted.

"We will introduce rigorous processes of supply-demand planning and we are prepared to risk under-supply rather than risk an overcommittment.

"If the reality is that Southcorp is overcommitted on grape supply then we may not renew some grape contracts when they expire.

"We recognise that many growers are doing it tough, however, if we drive growth successfully and sustainably, then there will be benefits all round."

Schmidt said he was unable to speculate on the future outlook for the individual Southcorp brands, wineries and other infrastructure, but he ventured an opinion that the already substantial Wolf Blass facility in the Barossa would probably be even more important in future.

“The strategy behind the Southcorp acquisition is all about growth and success will come from working with Southcorp. We have a huge amount of respect for the Southcorp brands and the talent behind them and intend to stabilise the Southcorp brands and apply our brand investment model to reinvigorate growth.”

“Foster’s is committed to ensuring wine quality, regionality and diversity. Our aim is to over-deliver at each price point and we are dedicated to differentiation in wine style and brand proposition,” said Schmidt

More than $A140 million has already been invested here in the last three years.

Schmidt noted that the Beringer Blass Wine Estates model focuses on the "premium heartland" with wines selling from $A10 to $A80 a bottle.

"Our production assets are best suited to concentrate on wines at above the $10 price point so we have used partner facilities (outsourcing) to expand into the sub $10 segment and we have chosen not to compete with the lowest cost producers in the sub $8 segment.

"The acquisition of Southcorp brings us new options in the entry-level bottled wine and cask segments," Schmidt noted. The big issue in understanding the ramifications of the merged business model is whether the forecasted $160 million in cost savings through business synergies and integration of functions including sales teams are achieved .

However, as a number of investment analysts and company researchers have pointed out, cost-saving benefits from takeovers are usually overstated or unrealised and integration risks are also often materially understated, as witnessed by Southcorp's own unfortunate experience with the Rosemount integration in 2001–03.

Having paid a high price for the Southcorp business, performance on these counts will obviously be paramount and virtually every level of the Australian wine industry is likely to be touched by the outcome.



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