Crikey’s grog expert, Peta Luma, discusses the real valuation of Southcorp and whether the Fosters price was fair.

Excuse me, but the defence of Southcorp by its board and management seems a little lightweight and whining. It is also very light on when you compare fact and reality.

The reality is that without the steady rise in Southcorp shares from November through to the end of December, the $4.17 price being offered to Fosters would have been a goodish premium to what was in the market.

Broking valuations were around $2.40 to a generous $3 or so and the steady rise in the price took everyone by surprise, with takeover talk the only reason advanced for the appreciation.

No broker or fund manager could find another reason.

The query in late December from the ASX and ‘don’t know’ from the Southcorp board pricked the bubble and the share price fell from $4.49 to $4.25 when it was suspended late last week after Fosters emerged with the 18.8% stake held by the Oatley family.

That ‘don’t know’ highlights the ingenuousness of the Southcorp board’s opposition. It is now clear that by December 29-30 the Oatley family had or was very close to accepting the price from Fosters. That they didn’t tell the board speaks volumes about relations in the board room, and this allowed chairman Brian Finn and the non-Oatley family board members to look very foolish by the ‘don’t know’ and then the subsequent deal with Fosters two weeks or so later.

Talk about looking like a bunch of chumps!

The fall of 24c says more about the true valuation of Southcorp than does the chat and urgings of the board and its advisers now, or the mutterings and market playing of hedge funds keen for a contested bid to emerge.

The plain fact of the matter is that Southcorp is expensive at these prices, even $4.17, compared to the reality of its earnings.

The board, led by chairman Brian Finn who is on the way out anyway, is whistling Dixie as it thinks it can summons up a contesting bid higher than $4.17 without showing a very sharp rise in recurrent earnings.

With the company’s interim profit due out in the next couple of weeks, the Southcorp board has the chance to put up a case for a higher price and reveal a generous improvement in operational profits, not earnings driven by the cost cutting program.

They do not a valuation make, despite the urgings of the analysts and others in the Southcorp camp.

The higher Australian dollar is hurting Southcorp, and also Fosters’ Bringer Blass operations, but currency movements can be used to explain pressures on earnings, but not used to justify or bolster higher earnings or excuse a slump in profits.

Like it or not, Southcorp has no chance of remaining independent.

The Fosters offer is compelling at the moment simply because they have 18.8% of the company (meaning a higher bidder cannot use the scheme of arrangement route) and will have to pay cash.

That would have been much easier two or three years ago when the Australian dollars was well under 70c. Now in the mid 70cs an offer from the most logical buyers, Allied and Diageo of the UK, or Pernod of France, will be quite expensive for what they are buying.

Of the three, there is logic in Pernod making a bid as it has the Orlando Windham business, with the international best seller, Jacobs Creek, to build on.

Buying Southcorp would give Allied or Diageo significant premise in Australia, but not the sort of market leading clout that it would if acquired by either Pernod or Fosters.

Pernod’s growth in Australia was initially through acquisition, but then became organic as they drove the Jacobs Creek brand and some of the Windham labels.

Both Fosters and Southcorp would do well to look at the Pernod recipe. It has been simple and long sighted and all about building brands and margins (the irony on a large French company owning one of the best selling Australian wines in the world, should not be lost on those in the industry and observing this battle. Pernod obviously believes there is more money to be made out of Australian wine than French, which should send a message to Southcorp and Fosters, and the shareholders in both companies).

For all the opposition of the board, Southcorp should explain why it allowed a key shareholder and board member in the Oatley family to become alienated to the point where they actively entertained and accepted the Fosters offer. Then they moved further into the Fosters camp by promising to back the bid with cash, sharing in any high price and then negotiating a favourable deal or two for the family.

Southcorp shareholders should ask the board and especially CEO John Ballard and chairman, Brian Finn how they allowed this split to happen, because the unhappy Oatleys have had their revenge.

Moves to downgrade the Rosemount brand obviously upset the Oatleys, according to another good story in today’s Australian Financial Review that was unfortunately buried in the paper, instead of being on Page One.

The AFR’s news judgement on this story has been so wide of the mark that you have to ask is the summer B team running things and are they blind to good news angles?

Monday’s AFR buried the news that the Oatleys would back Fosters’ bid with cash and today with some of the details of the family’s growing disillusionment with the Southcorp board.

It is that disillusionment which helps undermine the case of the Southcorp board. The company probably wouldn’t be in play today (and Fosters would still be wandering around summoning up the courage to bid) if the Oatley family had been still on board.

Management and board decisions led to the family’s disillusionment and the placing of the company in play.

For that reason the Southcorp’s board’s attitude to the price in the Fosters offer is lightweight carping and ignores its culpability in the present situation.

No split, no bid, or a bid at a price acceptable to all in an agreed bid.

If the Oatley family had been onboard the price probably would not have risen so much during November and December and if Fosters or anyone else had bid, the price would have been lower, but acceptable to all.

Finally there will be no ACCC problems because of the premium wine side of the equation at Fosters and Southcorp. Premium wine is a very subjective thing, to a person on $50,000 a year a premium wine starts at a price point that would be below what someone earning $100,000 a year would be prepared to pay.

It is all in the equation of quality, price and income level of consumer. Ease of entry into the premium end of the market is relatively easy and there are already a lot of competitors capable of making wines good enough to match the Penfolds brands (ignore Grange because it is full of hype).