Jan. 18 (Bloomberg) -- Foster's Group Ltd.'s A$3.1 billion ($2.4 billion) hostile bid for Southcorp Ltd. is a ``mistake,'' because it's paying too much to buy a company that's recovering from a record loss, while trying to boost earnings at its own wine unit, brokers including Merrill Lynch & Co. said.



Foster's A$4.17 a share offer for Southcorp is ``a poor decision, and we believe that the takeover bid isn't in the best interests of shareholders,'' said David Errington, an analyst with Merrill Lynch in Sydney. He cut his rating on Foster's, Australia's biggest brewer and winemaker, to ``neutral'' from ``buy.''

The bid comes midway through a one-year deadline set by Foster's Chief Executive Trevor O'Hoy to restore earnings growth at his Beringer Blass Wine unit, after a Californian grape glut depressed prices and cut earnings. Southcorp is closing wineries to reduce costs after a failed discounting strategy and writedowns from its acquisition of Rosemount led to a A$923 million loss in 2003.

``This is Foster's repeating mistakes from all sides, such as when Southcorp acquired Rosemount and Foster's bought Beringer,'' said Hugh Giddy, who helps manage the equivalent of $5.3 billion at Perennial Value Management Ltd. in Sydney. ``Not only are they paying a full price, there is a chance they will have to pay more,'' he said.

Sydney-based Southcorp yesterday rejected the Foster's bid as too low, and said it may ``just be its opening bid.'' Southcorp shares fell 9 cents, or 2 percent, to A$4.52 at 12:29 p.m. in Sydney after yesterday surging 8.5 percent.

Foster's shares climbed 8 cents to A$5.35 after slumping 6.7 percent yesterday.

Penfolds, Lindemans

Foster's, which paid $1.5 billion in 2000 for California-based Beringer Wine Estate Holdings, bought the business at the ``peak'' of prices for wine assets, Chief Financial Officer Pete Scott told analysts on a conference call yesterday. That won't be the case with Southcorp, he said.

The acquisition would give Foster's top-selling wines such as Penfolds and Lindemans, and create the world's biggest seller of premium wines, which sell for more than $3 a bottle. It's products would range from Penfold's Grange, Australia's most expensive wine, to Victora Bitter, the nation's top-selling beer.

Foster's would assume about A$500 million of Southcorp's debt, valuing the total acquisition at A$3.6 billion.

The bid values Southcorp at 14.9 times forecast earnings before interest, tax, depreciation and amortization for this year, compared with the 12 times earnings Foster's paid for Beringer and the 12.3 times earnings New York-based Constellation Brands Inc., the world's biggest winemaker, paid for Adelaide-based BRL Hardy Ltd. in 2003.

`Rich' Price

The offer ``looks rich,'' said Dawn Oldham, an analyst at Citigroup Inc.'s Smith Barney unit in Melbourne. She values Southcorp stock at A$2.90 a share.

The acquisition of Lindemans and Penfolds may ``cannibalize'' Foster's sales of Wolf Blass and Jamieson's Run wines, which sell for about the same price, she said.

``The deal makes sense strategically but there is the risk of indigestion,'' Oldham, who rates Foster's ``hold,'' said in a report. ``There is some reason to give Foster's the benefit of the doubt but Southcorp is a significant business to digest.''

Still, the strategic value of Southcorp may offset the ``relatively high'' price Foster's is paying, said Lucinda Chan, head of Asian business at Macquarie Equities in Sydney.

``This is quite a unique and irreplaceable position to be in the world wine market with icon brands and premium vineyards,'' Chan said in an interview.