t/o - some food for thought

I follow this stock, here is an article I pulled out of the files......

Banker uncorks more takeover speculation
April 19 2003
By Mark Todd
Sydney


Picture: PHIL CARRICK
Southcorp remains on a premium to the market despite price pressures in the US and UK.
Talk of Diageo plc making a $3 billion takeover for struggling winemaker Southcorp has flared again, based on information given by the UK spirits and wine group to investment bank ABN Amro.
ABN Amro has told clients, that Diageo - owner of brands including Guinness and Johnny Walker - was interested in buying Southcorp, based on recent talks with the company.
However, Diageo was reluctant to make a play with Southcorp shares so expensive, trading on a price to earnings multiple of 22 times forecast 2002-03 profit - more than a 40 per cent premium to the broader sharemarket, ABN Amro said.
Diageo is also believed to be reluctant to make a serious approach when there is still uncertainty about the outlook for Southcorp's earnings.
The company has admitted it may take years to restructure the UK operations. Fresh competition and a grape glut in California will put the US division under pressure for at least the next 12 months.


Nevertheless, the market pushed Southcorp shares 27¢, or more than 7 per cent, higher at one stage on Thursday to $4.
The stock eased to end the day a more modest 7¢ higher at $3.80.
Major investors were skeptical of a bid, with Diageo, Allied Domecq plc, and Foster's Group all touted as possible buyers.
"Southcorp is still on a premium to the market yet wine prices are going down in the US and UK," said Alliance Capital Management's Andrew McAuley.
"There's a wine glut at the moment and the dark cloud hanging over Southcorp is reflected in management's reticence to given any earnings guidance." Major shareholders, the Oatley family, are considered a stumbling block as they would have to incur a massive loss to accept a takeover offer.
The Oatleys paid an average $6 a share for their 19.7 per cent stake in Southcorp.
The increasing strength of the Australian dollar is another factor making Southcorp less attractive to a foreign buyer. The company is also facing a threat to the margins it earns in the US through the emergence of a budget category of $US2 wine, referred to as "two-buck chuck".