Another day, another deal. It seems that Foster’s can’t help itself but undertake company-transforming transactions. This might be because management get a bit bored selling beer. Admittedly, the decision to split Foster’s beer and wine businesses is a rare piece of good news for investors in the company, who have witnessed precious little capital growth for the best part of a decade.
It is expected that the separation may “unlock” more than a $1 billion in value. That value had previously been stripped from the company’s market capitalisation by investors who had long lost faith in Foster’s ability to operate a remotely profitable wine business.
Foster’s made its first leap into wine in 1996 when former CEO Ted Kunkel purchased Mildura Blass. Kunkel, had been recruited in 1992 from Canadian brewer Molson to save Foster’s after the disastrous reign of John Elliott (Foster’s had previously been known as Elders Brewing, a division of Elders IXL). Not long after acquiring Mildura, Kunkel upped the ante and spent $2.9 billion buying US-based wine company Berringer. (Berrigner was bought from private equity group Texas Pacific in yet another example of why one shouldn’t acquire assets from a private equity vendor).
In what would become a common event, Foster’s soon after wrote down the value of its Berringer Blass business by $300 million after a US wine glut depressed prices. Kunkel resigned shortly after and was replaced by long-time Foster’s executive Trevor O’Hoy.
Not long after taking the reins, O’Hoy increased the stakes once more, spending $3.7 billion acquiring Southcorp (which had itself undertaken a billion dollar loss-making merger with Rosemount a few years earlier). Foster’s had been approached by Bob Oatley, the billionaire sailing enthusiast and founder of Rosemount, who still owned 18.8% of Southcorp (which he sold to Foster’s for $584 million before Foster’s launched its formal bid).
Analysts and commentators questioned the acquisition at the time, but O’Hoy (who started working at CUB as a cadet in 1976) was publicly unrepentant, claiming that “we are clearly now on a double-digit growth pattern, around the 10% mark. Southcorp actually just enhances that. There is a few extra points of growth in it so that’s terrific for me. The attraction for us is our three-to-five-year plan, it gives us that growth. The Southcorp deal just takes us to another level”. (Privately, O’Hoy was understood to have been far more reluctant to purchase Southcorp, with the Financial Review reporting in 2008 that O’Hoy said in 2005 that he didn’t want to do the Southcorp takeover but changed his position after he saw Foster’s then chairman Frank Swan’s “horrified” reaction.)
O’Hoy should have backed his instincts and rejected the lure of Southcorp. In the end, after this week’s $1.3 billion write-down, Foster’s ended up losing about $3.5 billion on its wine forays. It appeared to take 14 years for Foster’s to realise that while beer and wine are alcoholic, there are few other similarities between their manufacture, marketing and distribution. A wine glut certainly didn’t help matters.
Foster’s wine debacle also casts a tremendous black mark alongside the career of one of Australia’s most prolific corporate directors, David Crawford. Crawford, one of Australia’s best-known insolvency experts, has served on the Foster’s board since 2001. (Interestingly, while Crawford has been a vocal critic of corporate governance advisers, accusing them of having “parallel with credit agencies, particularly with conflicts of interests”, he has not been as critical of “independent experts”, such as Lonergan Edwards, which infamously deemed Southcorp to have been worth between $4.57 and $4.80 per share).
Of course, not everyone was a loser — for Foster’s has long been a easy mark for Melbourne’s leading investment banks, who have reaped hundreds of millions of dollars from the brewer, come winemaker, come brewer, come takeover target. UBS was Foster’s one such adviser, earning millions providing takeover advice and arranging debt for the Berringer acquisition, while Credit Suisse was the lucky adviser on the Southcorp deal. Foster’s also infamously paid Macquarie Bank $100 million for the float of its ALH pub business in 2003.
Meanwhile, Westfield shareholders yesterday delivered a stinging rebuke to founder and executive chairman Frank Lowy, when a record 16% of proxy holders rejected the company’s remuneration report (last year, the “against” vote was only 9%. Lowy, the Czech immigrant who started Westfield from a Blacktown delicatessen with late business partner John Saunders in 1959, told shareholders at the company’s annual general meeting that “I don’t keep that money I get from the company, I give it away to a lot more deserving causes. I don’t think Westfield shareholders are a deserving cause to give them an extra cent.”
Westfield shareholders, who have paid Lowy and his two sons, Stephen and Peter, upwards of $130 million over the past five years, would be questioning exactly how much value they receive from their senior executives. While Lowy has spent a large amount of his time promoting Australian soccer, Westfield shareholders have seen the value of their stake drop by almost 20% since 2004, when Westfield merged with its separately listed trusts.
As for Lowy’s explanation of his remuneration — one would have thought that Australia’s richest man would be able to make sufficient charitable donations without needing to take a $16 million annual salary from Westfield shareholders.