Foster’s wine review dismisses demerger, restructure to take place
Foster’s has announced the outcomes from the ten month review of its Global Wine business, with no plans for a sale or a demerger.
Background on the Review
Foster’s wine review was initiated in April 2008 “as a result of unsatisfactory performance following the acquisitions of Beringer and Southcorp, a period which had seen quality of earnings deteriorate, competitive positions weaken and Foster’s failing to achieve required returns from its investment in wine.”
Since then the Foster’s Board has overseen the work conducted internally by management through the new CEO, Ian Johnston. Specialist input was obtained from external advisors and consultants where required, and the analysis and overall findings have been reviewed independently by Gresham Advisory, which has, in turn, advised the Board.
“The Review has been extensive and has included a comprehensive study of wine industry structure, business strategy, organisational design, operational capabilities and efficiencies, and economic and financial performance. The Review considered the attractiveness and feasibility of a wide range of organic and inorganic options available to Foster’s,” the company advised.
Since the review was initiated there have been many rumours about possible outcomes including those of a sale or demerger of the wine business. Foster’s has decided against both of these possible outcomes as the current economic climate dictates that now would not be a suitable time for such a decision to be made.
Summary of key outcomes from the Review
• Foster’s to retain and re-shape its wine business and implement significant organisational and operational change to improve performance
• Australian Wine and Beer, Cider & Spirits (BCS) divisions to be structurally separated to provide greater management focus, organisational simplicity, financial transparency and performance accountability
• Global supply operations to be integrated with respective demand regions to create end-to-end business units comprising sales, marketing, supply and functional support
• New and experienced operational leadership team to pursue performance improvement initiatives identified by the Review
– Alex Stevens appointed Managing Director of Australian BCS
– New Managing Directors of Australian Wine and Americas Wine to be appointed in the near future
– Peter Jackson to continue as Managing Director of EMEA Wine
• Sales force numbers to be increased in Australia to capture opportunities in both Wine and BCS (by around 25%)
• Overhead, procurement and manufacturing efficiency programs to be pursued to aggressively reduce costs
• Wine brand portfolio to be reshaped over time to focus on attractive segments starting with rationalisation of the Australian tail brand portfolio
• 36 non-core vineyards to be sold and 3 wineries to be closed, reconfigured or consolidated in Australia and California
• Overall operational benefits expected to exceed $100 million per annum in net pre-tax cost savings in F11 after allowing for additional investment in sales force numbers and other costs
• Total asset write downs and restructuring charges in the range of $330-415 million to be brought to account in H2 F09 ($130-165 million cash and $200-250 million non-cash) and approximately $60 million per annum of overheads to be transferred from Australian BCS to Wine resulting from structural separation
“As part of the Review, the Foster’s Board has considered the full range of ownership, organisational and operational options,” Foster’s Chairman, David Crawford reported. “In light of the operational opportunities available to improve performance, the Board has determined that shareholder value will be maximised by retaining the wine business. The current difficult conditions in debt and equity markets mean this is not the appropriate time to sell or demerge Foster’s wine business.”
“The performance of our Wine business has been unsatisfactory,” Mr Crawford admitted. “In large part this has been the product of poor execution in the Americas and pursuing a multi-beverage model in Australia. We are modifying our strategy and dramatically changing how we operate the Wine business by installing a new management team under the leadership of Ian Johnston.”
The review concluded that their wine business was well positioned in a structurally challenging industry but had failed to operate effectively.
“An encouraging outcome from the Review is that most major wine markets exhibit solid long term growth characteristics and the Foster’s Wine business is well positioned to pursue and grow its involvement in the attractive segments of those markets,” CEO, Ian Johnston, advised. “However, the Review has identified that poor execution and an ineffective organisational structure and culture have adversely impacted operating performance. The business has failed to keep pace with a dynamic market where execution is critical. Innovation rates have been below market and the portfolio has not been sufficiently adapted over time to take advantage of growth segments and mitigate exposures within the markets in which we operate.”
Costs and write-downs in the wake of the review were unfortunate, Mr Johnston noted, but would help the business prosper in the long-term. “While it is disappointing that Foster’s is to incur these additional charges, the Review has provided the platform to materially improve the performance and returns of the Wine business,” he said. “This will ensure that the value of the Wine business is maximised for Foster’s shareholders under all future scenarios.”