Wine Industry Report

Foster’s Group Limited (Foster’s Group) today announced that it has sold the Foster’s brand in Europe to current brewing and distribution partner, Scottish & Newcastle (S&N) for A$750 million.

Together with other related sponsorship and overhead restructuring initiatives also announced, this transaction will result in minimal earnings foregone.

Foster’s Group President & CEO, Trevor O’Hoy said:

“Over the past two years, we set ourselves three objectives: become No.1 in global premium wine, build Asia-Pacific’s best multi-beverage portfolio, and maximise the value of the global Foster’s brand. With the acquisition of Southcorp in 2005, and the development of a unique multi-beverage business in Australia well advanced, we achieved the first two objectives, and today we have begun to deliver on the third. This transaction allows us to break free of the shackles of the past, and move forward with a refreshed commitment to this icon Australian brand.

“Foster’s will always be “Australian for beer”, and continue to represent the Australian way of life in more than 150 countries around the world. We have achieved an outstanding price for the brand in Europe, reflecting the brand equity created by the Foster’s team over the past decade. In doing so, we have also won the freedom to promote and develop our other premium beer brands in Europe over time.

“We retain ownership of the brand outside Europe, in markets which account for approximately two thirds of global beer volumes. We remain absolutely committed to accelerating its growth in other promising markets, both internationally and in our home market of Australia, through best in class regional partnerships.”

Foster’s Group in Europe
Foster’s Group’s agreement to sell the Foster’s brand to S&N covers the UK and European countries included in the parties’ 1995 license agreement, as well as Turkey and several Eastern European countries, formerly part of the Commonwealth of Independent States.

The consideration of A$750 million significantly exceeds the value of the annuity stream that Foster’s Group would otherwise receive from the brand in Europe.
“Our 1995 agreement with S&N saw Foster’s assign the rights to brew and distribute the Foster’s brand in Europe to S&N in perpetuity. While our partnership with S&N has been highly successful in building the brand, the royalty economics of that deal, which was struck at a time when the Foster’s Group was in financial difficulties, have unfortunately not matched the dramatic growth of the brand in the region.

“This transaction is about unlocking and capturing the intrinsic value of the Foster’s brand in Europe for Foster’s Group shareholders, while providing S&N with the scope to continue to drive the brand going forward”, said Mr O’Hoy.

Tony Froggatt, Chief Executive of S&N, said:

“Since 1995, S&N has enjoyed a mutually beneficial relationship with the Foster’s Group. Under S&N, sales of Foster’s products have exhibited significant growth in both the UK and Continental Europe.

“As an Australian, I am proud that S&N is custodian of one of Australia’s best known brands.”

Foster’s – a global brand
Foster’s Group and S&N have agreed a brand protocol administered by the “Foster’s Council” to ensure that the basic integrity of the Foster’s brand is respected throughout the world. This allows full scope for each party to develop the brand commercially in their own markets, while developing global brand equity.
Richard Scully, Managing Director, Foster’s Brewing International will continue to oversee the development of the Foster’s brand on behalf of Foster’s Group and said:
“Our agreement with S&N ensures that the brand’s Australian origin, premium positioning, distinctive packaging, logo, taste, and high quality production standards will be consistently applied around the world. Foster’s Group and S&N will continue to share ideas on Foster’s Lager innovation and new product development to help drive sustained brand growth.”

As part of a program to significantly reduce overheads within the Foster’s Brewing International business, Foster’s Group will not be renewing its sponsorship of Formula OneTM at the end of the current season when its contractual obligations expire (December 2006).

“This sponsorship has been important for Foster’s, raising consumer awareness of the brand globally. While Foster’s Group will continue to co-ordinate global marketing initiatives, decisions about sponsorship will rightly rest with our co-brand owners and regional partners,” Mr Scully said.

Compelling financial outcome
The transaction will generate total pre-tax proceeds of A$750 million (approximately A$650 million after tax and transaction costs). This will result in a one-off gain of approximately A$650 million after tax.
Foster’s Group intends to use the proceeds to repay debt.
Foster’s Group estimates that the transaction would have had the following impacts on its pro forma financial results for fiscal 2006, that is had it been implemented at the start of the financial year (1 July 2005):
• A net reduction of A$10.8 million to Earnings Before Interest, Tax, and Amortisation (EBITA). Hence the consideration represents an implied EBITA multiple of 69 times;
• Earnings Per Share accretion of 2.7%;
• Reduction in gearing (Net Debt/Equity) of approximately 30 points; and
• Neutral to Return on Capital Employed (ROCE).

The transaction is expected to be completed during May 2006, with proceeds to be included in the 2007 financial year. There is no change to Foster’s Group’s current estimate of normalised earnings per share growth of between 12-14% for 2006.
As a result of this transaction Foster’s Group expects to reduce net debt below A$3 billion by the end of the 2008 financial year, one year earlier than forecast. Gearing at that time will be in the range of 50-60%.

Foster’s expects these transactions will have a positive impact on its credit ratings as assessed by Standard & Poor’s and Moody’s.

Approvals required
S&N’s acquisition of the Foster’s trademark is subject to Foreign Investment Review Board approval.