Fosters must prove its wines are worth it

The news that Foster’s has rejected a A$2.5 billion (£1.7bn) offer for its Treasury Wine Estates is good news for its shareholders. It means that someone wants to buy the unloved wines division and the beleaguered group’s shares jumped by about 6% on the announcement.

Assuming the offer is not increased and that there is no counter-bid, Foster’s plans to split its wine arm – including the Penfolds, Wolf Blass and Beringer brands – through a separate stock market listing next year.

One way or another, the divorce between beer and wine is going to happen. That begs an intriguing question – just how much are those wine brands worth?

Having spent almost A$7bn building up its wines business, Foster’s has subsequently had to write down more than A$3bn from its balance sheet as the world moved away from Australian bulk wines and the strengthening Australian dollar dented profitability. Now the company has to value these assets before either the demerger takes place or the division is sold. However, while it is comparatively simple to value wine stocks, it is a much more complex exercise to put a price on the label.

Consider whisky brands. Research for Chivas Bros shows that in the world’s top nine markets, 94% of consumers believe that the “age” of a whisky is an indicator of quality, 93% believe that older whiskies are better quality and 89% actively look for an age statement when deciding what to buy.  

So age matters in setting a price, but so too does the brand name under which that whisky is sold. They will pay more for a recognised and trusted name such as The Glenlivet than they will for the same whisky being sold as a newly launched Jock’s Auld Sporran – not that that is a possibility.

Consumers want a brand name as a confirmation of quality. That is why Coca-Cola spends a fortune every year defending its “Coke” brand and preventing the name being used as a generic term for cola.

Much of Foster’s wine is bought as grape under contract and is worth intrinsically less if eventually sold under an unknown label. Previous owners, and subsequently Foster’s, have spent millions of dollars and years of marketing effort in establishing Penfolds, Beringer and Wolf Blass as reliable brands. That has been at a cost to shareholders because money spent on advertising and promotion cannot be paid out in dividends in the same year.

The expectation is that in the longer term the investment will generate bigger sales at higher margins, something Fosters has struggled to achieve. How do shareholders now value their investment in those brand names in an attempt to recoup some of it?

Pernod Ricard has recently written off €100 million and €150m respectively from the values of its Kahlua liqueur and its Spanish wine interests, including Campo Viejo. Their performance suggests they are worth less than what the French group paid for them in the Allied Domecq takeover in 2005. This is now reflected on the balance sheet, despite plans to invest in the brands and eventually increase their intrinsic worth.

But it is more problematic to put a revised value on brands that are benefiting from considerable advertising and promotion expenditure such as Mumm or Martell. How much of the extra profitability of those brands comes from the increased quality of the product and extra sales and how much from the recognition of the name? Equally, distilling vodka is a simple industrial process. How much extra cachet does the Smirnoff name confer to that spirit and thus the price it commands for Diageo?

This is the conundrum now facing Foster’s and its advisers. Implicitly Cerberus Capital, the US investment group which made the bid for Foster’s wine division, has put a value on Foster’s wine labels as well as the stocks and other tangible assets such as property belonging to the company. The board has to produce arguments to show why combined they are worth more than the A$2.5bn that has been rejected.

Finance on Friday, 10.09.2010