Australia, Melbourne: Australia's largest brewer Foster's Group Ltd. is expected to post a dip in first-half profit after selling a pubs business, but investors will look for signs of recovery in the wine market to support its A$2.5 billion ($2.0 billion) bid for Southcorp Ltd, Reuters commented on February 3.

Wine earnings at both Foster's and Southcorp were hit last year by a grape oversupply in the United States, but Foster's has signalled a recovery as it seeks support for its move to become the world's second-largest wine company.

While investors generally back the long-term growth strategy, fund managers have expressed concern that the maker of Beringer and Wolf Blass wines will incur high acquisition costs and find it difficult to win cost savings from the merger. "We have been hearing that the wine price environment is starting to improve, and I would like to see some evidence of that in the accounts," Berren Asset Management Group Investment Manager Rupert Clifton-Bligh said.

Foster's is expected to report six-month earnings before one-offs of A$291.8 million on Tuesday, down from A$299.8 million a year ago, according to a Reuters survey.

One-off items will include the sale of its Lensworth property unit and a stake in pubs business Australian Leisure & Hospitality, spun off in late 2003, as Foster's positions itself as a pure drinks company.

Analysts said the decline in underlying profit was due to the pubs spin-off and a likely flat-to-weaker result at its wine division, which makes up about a third of earnings.

Foster's recently said an overhaul of its wine unit was on track, while the grape glut had been eased by a smaller vintage in the United States, where it sells two-thirds of its wine. "For the full year we should definitely see a turnaround, but the second half will be much stronger," Commonwealth Securities analyst Craig Woolford said.

The Australian beer and drinks division, which competes against Lion Nathan Ltd. with products such as Victoria Bitter beer and Cascade beer, and generates about 60 percent of earnings, was expected to post a strong first half.

Foster's said in October it was on track to meet its forecast for moderate earnings growth in the year to June 2005, excluding sold-off businesses. It expects double-digit earnings per share growth in fiscal 2006.

The world's largest wine company, Constellation Brands Inc. , last month reported healthy growth in its Australian and New Zealand wines and said its quarterly wine division operating earnings rose 13 percent.

Foster's and Southcorp shares have surged on the improved outlook and on industry takeover activity.

Foster's shares hit a high of A$5.90 on Dec. 29 before it launched its Southcorp bid. They gained 11 percent from the end of June to Wednesday's A$5.25 close.

Southcorp's shares gained 39 percent over the same period, closing at A$4.37 on Wednesday, and holding above Foster's hostile bid price of A$4.17. The main Australian stock index gained 17.8 percent over the same period.

Southcorp, which owns the Lindemans, Rosemount and Penfolds brands, is expected to post a 26 percent rise in first-half earnings later this month, as it rebounds from an earnings slump after a failed price discounting strategy in Britain.

A Reuters survey forecast first-half earnings at A$53.5 million, up from A$42.5 million a year ago, as the company pursues cost savings and improved sales.

"What the market is basically seeing is a strong profit increase, but it is from extremely depressed levels previously, Shaw Stockbroking analyst Scott Marshall said.

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