Fosters: That's 'Stralian for dine and whine, mate

Foster's hangover not over (Michael West)

Billions of dollars have been smoked on the altar of executive caprice and the company's declaration of $600 million to $700 million in writedowns barely touches the sides.

Berringer in particular was a disaster. It underperformed its US peers. Having splashed some $3 billion in capital over five years on this business, Foster's is staring at a paltry return this year of barely $US200 million, according to Merrill Lynch's numbers.

As for the acquisition of Southcorp, O'Hoy made the near fatal mistake of discounting some of Southcorp's famous flagship brands and tore up earnings for a time, particularly in the UK.

Merrill's analyst David Errington has been scathing on the Foster's strategy and has led calls for change, and O'Hoy's scalp.

It is worth noting that Errington has also been the most critical analyst on Wesfarmers' acquisition of Coles. If he has this one right too, Wesfarmers' shareholders had better watch out as its boss Richard Goyder has more or less bet the company on Coles at the top of the business cycle, employing shovel-loads of debt to boot.

Most "aggregation" plays, that is companies that go on acquisition sprees using their high-priced scrip to buy lower-rated companies, blow up at some point. And in general, most big acquisitions fail to generate adequate returns.

The admission by Foster's chairman David Crawford that the company's wine acquisitions had failed is a a timely reminder that most big acquisitions do not work for shareholders. It was also refreshingly honest.

Foster's is by no means alone in ballsing up acquisitions. It is, it fact, in the majority. While Incitec's spectacular purchase of WMC's fertiliser business paid for itself in a year, the likes of Computershare and Worley and Metcash have yet forged a savvy expansion path - and a rash of deals in the resources sector such as Xstrata's bid for MIM which had the luck of rising commodities prices - are feted as examples of value creation, just as many end up dogging shareholders for years.

Look at the experience of Australian banks offshore, the building materials companies in the US - before CSR's Rinker and James Hardie finally came good. Then there's Toll bid for Patrick and the present plight of Asciano, and the uber-acquisitive satellites of Macquarie and Babcock which are now under pressure, not to mention their shadows Allco and MFS. In property there is Centro, whose disastrous US foray hastened the end.

In insurance, the disastrous UK acquisition by IAG was, like Berringer, struck with sharp private equiteers on the other side of the deal. The big lumbering corporates are often sold a pup by private equity, which often has already stripped out the cash and run down costs to breaking point.

The jury remains out on Suncorp's acquisition of Promina - that one was struck at the peak of the insurance cycle. Even now, two years later, there is no consensus that this was a bad deal - but it is surely evident in the Suncorp stock price.

The armies of PR people and advisers at the revelation of a big acquisition, not to mention the carefully manicured pre-prepared spiels concocted for analysts and institutions, mean most deals are embraced at the outset. The market loves a deal, management loves a deal.

For a couple of years management can muddy the accounting waters and after that memories fade of the grand claims once made.

Foster's admits wine venture was a disaster (Scott Rochfort)

In a reversal of repeated assurances that the struggling wine business would soon generate a decent return, the chairman, David Crawford, said yesterday: "We must also recognise and acknowledge that we paid too much to acquire wine assets."

Prompting speculation that he and his board have in effect put a "for sale" sign on the embattled beverage company, the chairman refused to rule out the possible break-up of Foster's US and Australian wine and beer businesses.

In a recent note, Mr [David] Errington [Merrill Lynch analyst] estimated that, including its $2.9 billion acquisition of Berringer in 2000 and the Southcorp purchase in 2005, Foster's had invested $7 billion in assets that were "struggling" to generate $450 million in annual profits before tax and interest.

In another move that raised questions among analysts, Foster's transferred $600 million of the $1.6 billion in goodwill from the Southcorp business into the company's only solidly performing business, its Australian beer operation. It said the transfer "reflects a portion of Southcorp integration synergies" related to integrating its beer and wine distribution, back office and logistics operations.