Southcorp in rude good health as it fends off Foster's

Despite tough market conditions, Southcorp posted a 2.9 per cent increase in revenues for the six months to 31 December to A$574.4 million, lifting net profits to A$60.6 million, a welcome return to growth after a turbulent two-year period which has seen the once diversified group (it also owned a packaging division and an electrical appliance business) focus on building its core wine operations.

"Southcorp's recovery is on track and has started to pay dividends for our shareholders,"​ said CEO John Ballard. "We have delivered excellent earnings growth in flat global markets at the same time as commencing our programme of reinvesting significant new funding behind the marketing and promotion of our brands."​

He underlined the efforts of the company to reduce its debt levels. "Our focus on generating cash flow has resulted in a further A$146.7 million reduction in net debt during the period. This improvement leaves our total net debt position at A$451.7 million and supports our ability to reinstate dividend payments to shareholders."​

Net debt has been reduced by A$390 million from the peak of A$842 million in July 2003.

Foster's has been stalking Southcorp since January, when it acquired an 18 per cent stake in the firm. The beer and wine group argues that combining Southcorp's strong Australian brands (Penfolds, Rosemount, Lindemans) with those of Foster's (Mildara Blass, Beringer) would create a significant force in Australian wine, especially with the other major producers (BRL Hardy and Orlando Wyndham) currently owned by overseas groups (Constellation Brands and Pernod Ricard respectively).

But the robustness of Southcorp's first half performance suggests that Foster's offer underestimates the future value of the company, as chairman Brian Finn stated in a letter to shareholders.

"These results further underline why your board believes you should reject Foster's unsolicited bid for your shares as inadequate and opportunistic. Foster's offer price does not adequately reflect the strategic value of owning Southcorp, the profit improvements we are currently delivering nor the cost savings and other benefits Foster's could achieve by merging its wine business with Southcorp, should its takeover bid succeed."​

The earlier-than-expected reinstatement of dividend payments is an obvious ploy to keep Southcorp's shareholders onside, but it also reflects the new-found confidence on the part of the company, buoyed by excellent growth performances in the UK and Europe in the first half, offsetting sluggish sales performances in the Americas and the impact of the rising Australian dollar.

The company has maintained its modest profit forecasts for the year, despite the strong first half growth, but will clearly hope to exceed expectations once again in the second six months of fiscal 2005, bolstered by increased advertising and marketing expenditure and "early evidence that some of the oversupply issues which have hampered the global wine industry in recent years are receding"​.

However, the company also warned of the continued impact of currency exchange rates and "the lower availability of super premium wines"​ which could continue to take their toll in the second half.