The Australian dollar has surged lately, which has increased the price of the proposed sale of the Foster’s wine business for the various private equity firms currently considering it, according to Reuters. The Australian dollar is now worth above 99 U.S. cents, which makes made the $3 billion wine business about 9 percent more expensive than when Cerberus, a buyout firm, approached them last month.
(Reuters) – Private equity firms running the ruler over Australian brewer Foster’s wine business could baulk as the Aussie dollar’s surge to 28-year highs has raised the unit’s price tag by 20 percent since a sale was first proposed.
Private equity managers say banks may also be less willing to lend for a cyclical asset dependent on fickle consumers, compared with the defensive credentials of hospitals operator Healthscope — sold in July for A$2 billion ($1.97 billion) in Australia’s largest private equity buyout since the boom.
The Aussie’s rally above 99 U.S. cents last week made Foster’s $3 billion wine business about 9 percent more expensive than when the firm was first approached with an offer from U.S. buyout firm Cerberus last month.
The currency has also surged 20 percent since Foster’s first proposed separating its beer and wine businesses in May, a move that was seen as putting both assets into play.
Although Foster’s rejected the $2.6 billon advance for the wine business as too cheap, talk persists that some of the world’s largest buyout firms including Kohlberg Kravis Roberts and TPG are eyeing the wine business, which owns top brands Penfold’s and Beringer.
But analysts say a successful bid from any international player now appears less likely.
“Most of these players are all U.S.-dollar based. The acquisition price has suddenly become 10 percent higher so it is becoming a real issue,” said Arnhem Investment partner Theo Maas.
As well as lifting the cost of a deal, the strong dollar eats into U.S. wine earnings translated back into local currency. Foster’s said the dollar took a A$123 million chunk out of profits last fiscal year.
Foster’s has said it is continuing with plans to split its beer and wine businesses in 2011.
NEED TO CONVINCE BANKERS
Private equity players are seen as the more likely buyers of Foster’s wine or its A$10 billion beer business, Australia’s biggest, with the interest of trade buyers said to be waning.
Industry sources in Japan downplay interest by No. 2 brewer Asahi, which said in August it expects to have $9.2 billion on tap for acquisitions.
Deutsche Bank meanwhile said in a note last week that SABMiller, the world’s second-biggest brewer, would find Groupe Castel’s African beer unit a more compelling growth option than Foster’s in the mature Australian market.
Interest from Deutsche-advised Canadian brewer Molson Coors is also said to have waned.
A private-equity buyout of the struggling wine operations, with a book value of $3 billion, would need to convince bankers of the merits of backing a cyclical asset.
“I’m not sure you’ll be able to get lending for that sort of business,” said a buyout industry source.
“Healthcare assets you can get leverage for. Retail assets are very hard to get leverage for.”
Some bankers agreed. “High levels of leverage, volatility and cyclicality don’t normally go hand-in-hand,” said one.
“There would still be appetite potentially in those sectors, but it would be at lower leverage levels.”
Another banker close to private equity said Foster’s price expectations were too high.
Others said the target’s industry was less of an issue provided the cashflows were reliable.
“It definitely takes longer to get a package together. You need to corral a bunch of banks together to get a deal done and that is also why deals are slower to get done,” said Macquarie Group head of alternative investments Michael Lukin. The Healthscope buyout was backed by 17 banks.
Banks are hungry to lend to leverage deals as there has been little activity in the market this year.
Leverage volume was only $974 million from six deals, according to Thomson Reuters LPC data, excluding the A$1.5 billion leverage loan TPG and Carlyle Group raised to acquire Healthscope, as the deal only closes later in October.
Foster’s wine business, which has been rebranded as Treasury Wine Estates and owns vineyards from California’s Napa Valley to the Hunter Valley near Sydney, is seen as attractive to buyout firms because of depressed earnings at the weak point of the wine cycle after years of oversupply.
Big private equity firms could club together, as happened with the bidding war for Healthscope, which at one stage had five of the world’s biggest buyout firms slugging it out.
An equity check of 40-50 percent is seen as necessary for any deal but shouldn’t be an obstacle to global buyout firms, which are sitting on unspent billions raised during the boom. “There won’t be many transactions as solid, as defensive a credit story as Healthscope. It ticked all the boxes. But the banks will just adjust the leverage accordingly,” said a senior LBO financing banker who asked not to be named. (By Victoria Thieberger. Additional reporting by Sonali Paul and Sharon Klyne; Editing by Dhara Ranasinghe)