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The City

Published:  18 January, 2007

Remember this date: 21 April 2005. It was a day that transformed the drinks industry. Allied Domecq agreed to the 7.4 billion takeover bid from Pernod Ricard and Fortune Brands that, if unopposed, will put the French group firmly in the number-two slot in the world of spirits and give Patrick Ricard the springboard from which to take a tilt at Diageo's crown.

It was also the day on which the world's largest premium wine business was effectively created by the majority of Southcorp's directors recommending a 1.3 billion bid from Foster's.

The Australian deal seems certain to proceed despite objections from Southcorp's chief executive, John Ballard, and a non-executive director, Ern Pope, who believe the Foster's offer significantly undervalues Southcorp and the synergies that will be achieved by bringing together the Wolf Blass and Beringer labels with the Rosemount, Penfolds and Lindemans portfolio.

Foster's grabbed an 18.8% stake in Southcorp at the start of the year, effectively blocking rival offers for Australia's biggest wine producer, and most analysts believed it would land its target with its initial A$4.14 per share bid. But shareholders hoped for a better offer, despite the most obvious suitors (Allied and Pernod) being ruled out by the cost of their own plans. So Foster's upped the ante to A$4.24, which has made some analysts blanche but, pleasingly, leaves those speculators who pushed Southcorp's price up to A$4.76 in anticipation of rival bids nursing severely singed fingers.

Even so, many still believe Foster's is paying a very full price. The bid values Southcorp at about 16 times its forecast earnings before interest, tax, depreciation and amortisation (EBITDA) for this year. Foster's itself trades on a multiple of just 11, and the offer price compares unfavourably with the 12 times EBITDA Foster's itself paid for Beringer in 2000 and the 12.3 Constellation paid for BRL Hardy two years ago.

True, Southcorp has started to emerge from the crisis created by price discounting, but there is still a grape glut Down Under and the low level of the US dollar makes for difficult trading. On the other hand, together Beringer Blass and Southcorp make strategic sense and create Australia's first leader of a global market.

The smart money, however, is on Pernod Ricard to make a better fist of its deal than the Australians, at least in the medium term and provided its bid for Allied is not trumped. The French have a proven track-record of making amalgamations work, whereas Foster's shareholders have had a bumpy ride. And the speculation is rife already that the best way forward for the newly enlarged Foster's will be to de-merge its wine interests from the beer division. But that's a few harvests off yet.