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SABMiller preparing new Foster assault

Global brewer SABMiller is set to renew its assault on Australian bid target Foster's later this month with a slightly higher offer likely to succeed after rival bidders fail to appear, bankers and investors.

The London-based brewer will wait for Foster's full-year results on Aug. 23, which will make dismal reading with beer profits set to tumble, before increasing the pressure on Foster's board to accept its current A$11.2 billion ($11.4 billion) or slightly increased cash bid.

With Foster's share price falling below SABMiller's bid level over the past few days, the offer has become more attractive and investors are now putting pressure on the Foster's board to talk to SABMiller.

The shares hit a low on Tuesday of A$4.51 as hopes of a rival bid faded and global stock markets tumbled. Foster's shares recovered to close at A$4.93 on Wednesday, close to SABMiller's bid price of A$4.90.

“SABMiller will be very disciplined, they will wait for Foster's results, pile the pressure on Foster's shareholders and the Foster's board, and then agree to a slightly higher bid,” said one investment banker with knowledge of the situation.

When SABMiller launched its bid for Foster's in June, analysts said the London-based brewer might have to pay up to A$5.20-A$5.40 to succeed, but now they believe A$4.90-5.10 will win the day, according to a Reuters poll.

A deal would join together the brewer of Miller Lite, Peroni and Grolsch with the Melbourne-based maker of Victoria Bitter, Pure Blonde and Cascade beer, and would be the biggest deal since InBev paid $52 billion to buy Anheuser-Busch to form AB InBev in the world's biggest cash takeover in 2008.

“SABMiller has shown itself to be disciplined by walking away from Schincariol, and if it were to walk away from Foster's the shares could sink towards A$4,” another banker said.

SABMiller pulled out of the bidding for Brazil's second biggest brewer Schincariol as the price rose sharply leaving Japanese group Kirin Holding to seal a deal paying $2.6 billion for a 50.45 percent stake.

Foster's chief executive John Pollaers has been dismissive of SABMiller's approach, describing it as “so far from reality that it was not worth engaging”, later adding he was not saying the company would never engage in talks.

Foster's share price is undermining the position of Pollaers, a former navy weapons engineer who has headed the brewer since April 2010, and after its close at A$4.93 SABMiller may not need to raise its bid much to win.

“It definitely lessens the chances - short of another bidder emerging - of SABMiller actually lifting their offer,” said Jason Beddow, chief executive of Argo Investments in Sydney, which hold Foster's shares.

“It puts the pressure back on the Foster's board. They have rejected A$4.90. From a short-term perspective the Foster's share price would definitely come under pressure if SAB walked away,” he added.

Foster's shares traded as low of A$4.23 in May before jumping as high as A$5.23 a day after SABMiller's bid on June 21.

Analysts say the door has to be open to talks as Foster's profit and beer volumes will be down and shareholders will likely be very unhappy while SABMiller's position is becoming stronger with Foster's share price weak and as the Australian dollar slides , cutting SABMiller's financing costs.

“You have got an underperforming company, their strategy has not worked. The only thing you are missing is a hostile shareholder base,” said one Australian based analyst.

SABMiller's bid values Foster's at 12.5 times current year forecast earnings before interest, tax, depreciation and amortisation (EBITDA).

That is around the global average for recent deals, but below other mature market beer deals such as when Kirin bought Australian brewer Lion Nathan in 2009 for 13.1 times and InBev bought Anheuser-Busch for 13.8 times in 2008, and well below the 15.7 times Kirin paid for Schincariol.

Analysts have said SABMiller could pay up to A$5.40 for Foster's and still make a deal pay, but with no rival bidder and volatile world stock markets it is unlikely to want to pay that much, especially when there are limited synergies.

They estimate these at around A$150 million in terms of cost savings and efficiencies in manufacturing and procurement.

Foster's holds nearly a 50 percent share of the Australian beer market where it earn some the best margins in the developed world in a virtually duopoly with Kirin-owned Lion Nathan, which has a market share of around 40 percent.

But Foster's has been losing market share and has forecast its beer volumes in the six months to June would decline 3-4 percent, a slight improvement from the December half.

SABMiller is being advised on the bid by JP Morgan, RBS, Morgan Stanley and Moelis, while Foster's is advised by Goldman Sachs, Gresham and Allens Arthur Robinson.

Reuters

11 Aug. 2011

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