Question

Many critics of the Foster’s Group Ltd takeover of Southcorp Ltd cited a strategic error in judgement of the Foster’s Group Ltd board. Foster’s Group Ltd also took on significant debt to purchase American wine interests. Their main concerns were firstly, that the board paid too much and secondly, that the wine and market operates differently to the beer market. Just because both are alcohol-based products does not mean they are similar to operate. Commentators believed that the beer business was a good cash business and one that is generally robust in down times. (People still like their beer even in recessions.) However, the wine market was more competitive and had an overabundance of supply that would make it hard for the Foster’s Group Ltd to strategically brand. The investment in the wine businesses would also take leadership time away from the beer business as the Foster’s Group Ltd spent time on growing the wine business. Approximately five years after the Southcorp Ltd takeover the Foster’s Group Ltd entered into a scheme of arrangement to demerge the beer business from the wine business. In May 2011, shareholders in Foster’s Group Ltd received one share in Treasury Wine Estates (the new company for the wine business) for every three shares they held in Foster’s Group Ltd. Following the split, the Foster’s Group Ltd assumed most of the debt. Below is some financial information regarding Foster’s Group Ltd at takeover and demerger times.

	Demerger		Takeover
	2011 $’000	2010 $’000	2005 $’000	2004 $’000
Net cash flows from operating activities	749.5	934.7	523.4	657.0
Net cash flows from investing activities	(209.7)	(89.9)	(2 314.3)	938.1
Net cash flows from financing activities	(705.9)	(735.8)	1 885.3	(1 225.4)
Total cash flows	(166.1)	109.0	$94.4	369.7
Ending cash balance	58.3	236.7	791.9	706.8
Net profit from continuing operations	1 046.9	553.0	936.1	799.3
Net finance income/(costs)	16.3	(118.8)	(99.1)	(94.9)
Total assets	2 997.3	6 829.8	11 745.3	8 443.1
Total liabilities	2 597.7	4 114.4	4 944.1	4 600.2
Non-current interest bearing liabilities	1 573.5	2 242.6	4 431.6	1 259.6

REQUIRED:

Judge whether you feel the critics were correct in their assessment of Foster’s Group Ltd entry into the wine market.                                                                                         

Confirm whether Foster’s Group Ltd is a good ‘cash’ business.                            

Answer 1

No, I don't feel critics were correct in their assessment of Foster's Group LTD entry into the wine market as their coming in wine market will make their business more diversified and it will help them to establish themselves as a major brand in the whole alcohol segment.

Also financial figures goes to show that their fine business even after takeover is able to make profits. Although the profit has not grown to multiple times. But it is decent enough for the company to add to it's capital more operating profit. Thus critics were not that correct in their assessment of foster's group entry into the wine market.

Foster's Group is having a positive Cash flow from operating activities continuously. As we can see in the year 2010 they were able to generate Cash flow from operations amounting to $934700, and in the year 2011 they were able to generate Cash flow from operating activities to the extent of $749500. Although, they are having negative Cash flow from investing activities and financing activities but it is because of the reason of various major incident taking place like demerger etc. , Which are occasional events and it will soon Return to positive Cash flow track.

This, fosterf group is a good '''cash' business.