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Bid for Foster’s may need a top-up

FOSTER'S shares pretty much kept pace with the sharemarket's latest rally yesterday despite a pedestrian June 30 result because there was enough in the profit and what chief executive John Pollaers said about it to suggest that SABMiller will need to sweeten its $4.90 a share offer to win control. Not to the $6 mark that Foster's wants, however.

SABMiller's bid puts an enterprise value (market value plus net debt) of $10.4 billion on Foster's. That's 12.7 times earnings before interest and tax of $887 million that Foster's announced yesterday, and when it releases its formal defence, Fosters will produce comparisons with other beer industry takeovers that make that look a bit light.

The key comparison is Kirin of Japan's takeover of Lion Nathan in 2009. The EBIT-to-enterprise value multiple in that case was 15.2 times, which, all other things being equal, points to about $5.95 a share for Foster's.

Advertisement: Story continues below Foster's will point to overseas deals that were more expensive too, but SABMiller can cite other takeovers that were cheaper and argue that, on other profit-to-enterprise-value measures, it is pretty much matching the price Kirin paid for Lion. It will also point out that Kirin bought a company that was gaining market share, while it is bidding for one that has been losing it.

Foster's said volumes slid by 5.2 per cent during the year and by 6 per cent for beer, in line with the beer market overall, in a year that Pollaers said was the toughest since the recession years of the early 1990s.

That means beer market share was stable, overall, although Pollaers argues that market share is no longer the prime number. He says the group will not subsidise beer sales and actually allowed the group's bottle-shop beer market share to fall slightly in the June half after withholding supplies temporarily from outlets that were either discounting too heavily, or threatening to.

Foster's shares were sitting at the bid price before the result and closed 9? or 1.8 per cent higher at $4.99 yesterday. The market rose by 2.2 per cent, so investors are hunting for a bump, but also agreeing with Pollaers that there's a lot of renovation work to come. The steady beer market share, for example, flatters the local brands because it includes Foster's star imported beer, Corona, which grew volumes by 15 per cent in the imported beer segment that accounts for 9 per cent of the Australian beer market.

Hedge funds - which want a bid to sell into - still control between 10 and 15 per cent of the brewer's shares; retail shareholders - who have in the main been on the share register for years - control another 20 to 25 per cent and about three-quarters of the group is owned by institutions.

Pollaers has contacted most of the institutions and is getting no feedback that $4.90 should be embraced.

That will change if SABMiller sweetens the bid to give Foster's shareholders an up-front piece of the renovation gain that Pollaers is promising to deliver over the next few years - a gain that it will also capture if it takes control: about $5.50 looks right to me.

WHEN the brouhaha over BlueScope Steel's decision to halve steel production at Port Kembla and quit steel exporting at a cost of about $500 million and 1000 jobs has subsided, BlueScope will probably be re-rated by the market.

Closure was inevitable given that exports were costing the company $250 million a year after the soaring Australian dollar and record coking coal and iron ore prices pushed its production costs from just within the top quartile of world steel producers to the bottom of the third quartile - but the retreat is being done in a way that gives BlueScope options.

Steel production will halve to 2.6 million tonnes a year with the closure of one of the group's two Port Kembla blast furnaces, but only one of BlueScope's four Kembla coke ovens will be closing down. Coke that is produced and not consumed by the remaining blast furnace can be profitably exported and, if the price of coal and iron ore eases and the Australian dollar also falls, BlueScope can resume exporting by firing up the shuttered blast furnace and directing coke production towards it.

The closure of one of the coke ovens means the previous production of 5.2 million tonnes would not be attained, but a return to production of about 4.2 million tonnes a year is possible.

When the current restructuring is complete expect BlueScope to be in the market for coking coal and iron ore reserves of its own. It fought for but lost its Illawarra coal reserves when it was spun out of BHP a decade ago and has been looking at coal and iron takeovers ever since. It knows it erred in not moving before the commodity price boom took off and will fix the mistake if the boom cools.

24 Aug. 2011

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