In building SABMiller Plc (SAB) from Africa’s biggest brewer to the world’s second-largest by volume, Chief Executive Officer Graham Mackay has earned a reputation for not paying too much for purchases. His desire to snare Foster’s Group Ltd. (FGL) will test that discipline.

SABMiller said yesterday it will continue to pursue Australia’s biggest brewer after Foster’s rejected a A$9.5 billion ($10 billion) offer at A$4.90 a share. London-based SABMiller may have to raise its offer by 8.2 percent to A$5.30 a share to secure a friendly takeover, according to the median estimate of seven analysts surveyed by Bloomberg.

“They have a management ethos of not overpaying for an asset,” said Samar Chand, an analyst at Barclays Capital in London. “SABMiller will make another bid, but it won’t be a step-change increase from where we are now.”

Mackay has made more than two dozen acquisitions since he moved the company’s listing to London in 1999, though he’s passed on many of the industry’s biggest deals since 2008. He shunned buying the beer unit of Fomento Economico Mexicano SAB last year after rival Heineken NV (HEIA) paid up a price it deemed too high. Foster’s, the most profitable independent major brewer, would be his biggest purchase yet and add about half the Australian beer market to SABMiller’s portfolio.

“We expect SABMiller to return with a higher bid, though question whether it can meet our view of the board’s expectations,” said Andy Bowley, an analyst at Citigroup Inc., who estimated that Foster’s board wants an offer of A$5.40 to A$5.50 a share. He has a “hold” rating on Foster’s.

Stock Decline
Foster’s shares rose about 14 percent to A$5.14, the most in 25 years, yesterday. SABMiller’s shares slid 79 pence, or 3.6 percent, to 2,103 pence in London trading, the biggest decline since Jan. 19. SABMiller stock has risen almost fivefold since the listed in London at 428 pence a share in 1999. Heineken shares have gained about 35 percent in that period.

The offer for Foster’s “is expensive already,” said Gerard Rijk, an analyst at ING Groep in Amsterdam. “You only have to look at the SABMiller share price to know that.”

SABMiller’s offer for Foster’s, which last month split off its wine business, values the company at about 11.8 times the earnings before interest, taxes, depreciation and amortization reported by the beer division last year. Nomura estimates that the average multiple for key transactions in the beer industry in the past five years was an enterprise value of 13 times earnings.

Emerging Markets
The bid “is the first step, and then they will start talks” with the Foster’s board, said Rijk. In past brewing transactions where the bidder’s first proposal was rejected, offers were accepted at about 10 to 15 percent higher than the original bid, he said. InBev NV raised its 2008 bid for Anheuser-Busch Cos. to $70 from $65 before gaining control of the Budweiser maker.

SABMiller has a higher exposure to emerging markets than most rivals and is therefore considered to have less to lose by increasing its exposure to developed markets. The percentage of earnings from markets outside the U.S. and western Europe would drop to about 70 percent after buying Foster’s from more than 80 percent now, Deutsche Bank AG analyst Jonathan Fell estimated.

“SABMiller, or another potential suitor, will need to offer above A$5 per share for the Foster’s board to recommend a bid to shareholders,” Nomura analysts including David Cooke said in a note to investors yesterday. Nomura estimates A$5.10 is fair value for the company and that potential buyers “could find it difficult to bid much further above A$5.10 per share given the subdued growth returns profile” of Foster’s.

Profit Margins
An acquisition may boost SABMiller’s profit margins. Foster’s beer business had an operating margin of about 38 percent in the 2010 fiscal year, the company said in a presentation to investors in February. That compares with SABMiller’s profit margin of 22 percent, according to data compiled by Bloomberg.

SABMiller said the proposed takeover will be funded from existing resources and new debt facilities. The brewer plans to fund the bid with about $10 billion of debt, according to two people with direct knowledge of the situation. The company’s net debt to Ebitda ratio would increase to 3.6 times from 1.3 times, according to estimates by Ian Shackleton, an analyst at Nomura in London.

Acquiring Foster’s would give SABMiller access to a “resilient” economy in Australia, with increasing disposable income, CEO Mackay said yesterday. The company has a “sound understanding” of the Australian market, he said, and can improve revenue growth by selling more higher-priced beer.

The bid may spark a takeover battle for Foster’s. Japan’s Asahi Breweries Ltd. and Mexico’s Grupo Modelo SAB de CV are among rivals that may make offers, according to analysts. SABMiller may have to raise its bid by about 13 percent based on the price paid by Kirin Holdings Co. for Lion Nathan Ltd., Australia’s second-largest brewer, in 2009, said Dirk Van Vlaanderen, an analyst at Jefferies International in London.

“We expect SABMiller to return with a better offer given that the first offer, whilst looking to be reasonable on valuation, is by no means punchy,” Shore Capital analysts said in a note.