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It’s all but cheers to Foster’s as global beer economics scales new heights

THE board of Foster's Group awaits the next move in the multibillion dollar takeover battle for the country's biggest beer company, two private equity operators are hoping some of the takeover dust comes their way as they crank up the search for a strategic partner for alcopop group Independent Liquor.

The modus operandi of private equity operators is to buy a business with a strong cash flow, squeeze costs, bulk up the revenue and flip it after three to five years through a trade sale or float.

In the case of Independent, it has been 4? long years since Pacific Equity Partners and Unitas jointly acquired the alcopop maker, whose brands include Woodstock, Vodka Cruiser and Purple Goanna, for a massive $NZ1.3 billion, dramatically out-bidding trade buyers such as Brown-Forman, Lion Nathan, Diageo and Asahi.

Advertisement: Story continues below The initial attraction of Independent was its strong cash flows and the fact that Australia was an anomaly in the global alcohol market. The penetration of ready-to-drink products was twice as high as that of any other market.

But the global financial crisis, a radical change in taxes on ready-to-drinks and changing consumer tastes slashed revenue and forced the private equity owners to pump in up to $50 million in fresh equity through the issue of new shares in New Zealand company Flavoured Beverages Group Holdings.

Fast forward to today and the company has been busy cutting costs and expanding into the US and Asia, helping its earnings before interest, tax, depreciation and amortisation (EBITDA) surpass what they were before the global financial crisis and tax changes.

It is now putting the word out for a partner to help accelerate growth in international markets. Names touted include Bright Foods, Coca-Cola Amatil, Suntory and Asahi.

While UBS is busy looking for a suitable deal for its private equity clients, and playing on the fact that once Foster's is sold Independent is the last big alcohol business left for sale, SAB Miller, along with Foster's shareholders and hedge funds, are trying to find the magic price that would clinch a sale of Foster's beer business.

For SAB, its final bid price will factor in the cost of losing two lucrative beer licences, Stella and Corona, which contribute more than $100 million a year to Foster's pre-tax profit. While there is no guarantee that Foster's would lose these licences with a change in ownership, they are such powerful contracts that any potential buyer would need to factor in the possibility.

The Stella beer licence is to expire in the next year and competitors will no doubt start lobbying the owner of Stella, Anheuser-Busch InBev, the world's largest brewer. The chances of Foster's keeping the licence, worth about $15 million a year, are far from guaranteed.

Indeed, since the global merger of Anheuser-Busch and Inbev, the new entity's strategy is to appoint one brewer in each region to manage its licences.

Right now, its beer licences in Australia and New Zealand are split between beer duopolies Lion Nathan and Foster's. But it tipped the balance in Lion Nathan's favour when it granted Lion the licence to produce and distribute its Budweiser brands in Australia and New Zealand. Lion also has the licence for Becks.

Industry sources suggest Foster's generates more than $80 million in earnings a year from Corona.

Foster's EBITDA in 2010 was $1.2 billion and Merrill Lynch estimates in 2011 it will be $894 million.

Some analysts value Stella and Corona licences at between $350 million and $380 million. Lion Nathan holds the Corona licence in New Zealand.

If SAB succeeds in buying Foster's, the issue will be whether Modelo wants to stick with the new owner or go to someone else, particularly if Anheuser-Busch InBev - which owns 50 per cent of Corona - decides to increase its stake in Modelo in what could become the next chapter of the global consolidation of the beer industry. If this happens, the Corona brand would then be in the Anheuser-Busch Inbev portfolio.

Another factor is Foster's IT system, which is the backbone of the business and is currently joined at the hip with its separately listed wine business.

Foster's and Treasury Wine Estates are currently trying to split the integrated platform but this will take until 2013 at a cost of $42 million.

Any new owner would want to accelerate this as the core operation of both businesses, including orders, delivery, receivables and sales, are enmeshed on one platform.

Foster's full-year results will be out in August and the market isn't expecting anything too flash as the whole market is down. While Foster's will no doubt try and pull a few rabbits out of the hat, and claim momentum and highlight hidden value, if Foster's boss John Pollaers fails to convince investors of growth prospects, pressure will mount on the board to accept a takeover - fast.

Foster's has disappointed investors for years. The latest ACNielsen figures show market share is below 50 per cent, after being 54 per cent a few years ago.

The reason? A lack of product innovation, changing consumer tastes, the rise of private label brands in the supermarket chains, the entrance of new competitors, poor management and parallel importing.

In beer economics, less production volume means less recovery of production fixed costs. It's all to do with losing or winning scale economies.

And that momentum has been steadily moving against Foster's towards Lion Nathan, Coopers and the supermarket chains. Time has run out for Foster's; it is now about getting the best price.

27 Jun. 2011

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