SABMiller Spurning Femsa Means Higher Foster’s Price: Real M&A

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SABMiller Plc, which walked away from last year’s biggest beer acquisition, faces the prospect of paying the most ever for Foster’s Group Ltd. as it tries to boost profitability.
SABMiller, the second-largest brewer by volume, is working with JPMorgan Chase & Co. to study a bid for Foster’s once Australia’s biggest brewer completes a spinoff of its wine unit, a person with knowledge of the situation has said. Foster’s beer business, with the highest operating margin of any independent brewer, is valued at $11 billion, Nomura Holdings Inc. said. That would be almost double SABMiller’s largest takeover and more than the $7.7 billion deal announced by Heineken NV last year for Fomento Economico Mexicano SAB’s beer business, which SABMiller spurned, according to data compiled by Bloomberg.
Chief Executive Officer Graham Mackay has handed SABMiller shareholders a 57 percent return in dollars in the past three years, at least five times more than Anheuser-Busch Inbev NV and Heineken, as it passed on some of the industry’s biggest deals to expand in Asia and Africa and cut its debt-to-cashflow level to a six-year low. Now, as higher costs in emerging markets drive down its return on equity, SABMiller is considering buying Foster’s in what may be the industry’s third-largest deal.
“It is obviously some time since they’d done a large deal so they’ve got quite a strong balance sheet,” said Matthew Jordan, head of research at Matrix in London. “If they could get it at a cheap price, I think it would be a strategically sensible thing to do.”

The High Life
Troy Hey, a spokesman for Foster’s in Melbourne, declined to comment on “market speculation” the company may be a takeover target. Nigel Fairbrass, a spokesman at London-based SABMiller, declined to comment on possible acquisitions.
The company, which started in 1895 selling beer to gold prospectors in South Africa, became SABMiller after South African Breweries Plc bought Miller Brewing Co. for $5.6 billion in 2002, data compiled by Bloomberg show.
The maker of almost 200 brands from Miller High Life to Lech Lite and Chairman’s Extra Strong Beer became the second- largest by volume after at least 30 deals in developing nations from Colombia to Poland and India, getting about two-thirds of its sales outside the U.S. and Europe.
Since 2008, SABMiller passed on the biggest deals as almost $100 billion of acquisitions in the beer industry were completed, including InBev NV’s $60.8 billion takeover of Anheuser-Busch Cos. and the $18.7 billion joint bid by Heineken and Carlsberg A/S for Scottish & Newcastle Plc.

Foster’s Bid
SABMiller is now studying a bid for Foster’s, working with New York-based JPMorgan, according to a person familiar with the situation who declined to be identified because the discussions are private. The brewer passed on Monterrey, Mexico-based Femsa’s beer unit because it was too expensive, a person familiar with the matter said when Amsterdam-based Heineken’s acquisition was announced last year.
Speculation increased that SABMiller may purchase Foster’s after the Melbourne-based company said on Feb. 15 that it plans to spin off the world’s second-largest wine business by May to focus on reviving beer earnings. Outgoing Chief Executive Officer Ian Johnston said on a conference call that day Foster’s board of directors would consider any bid if it came along.
“It’s the kind of thing that an acquirer would want,” said Matthew Rhodes-Kropf, an associate professor of business administration at Harvard Business School in Boston. “It seems compelling for somebody who’s trying to acquire a series of brands to have market power.”

‘Walking Away’
A takeover by SABMiller could cost at least $11 billion, based on Foster’s 12 times earnings before interest, taxes, depreciation and amortization of about $917 million, according to Ian Shackleton, a London-based analyst at Nomura.
Andy Bowley, a Sydney-based analyst for Citigroup Inc., says Foster’s may command 12 times to 12.5 times his Ebitda estimate of A$911 million ($918 million) for 2012. That would result in an acquisition valued at as much as $11.5 billion.
SABMiller, which has rejected deals completed at lower valuations, may not be willing to pay up for Foster’s, according to Samar Chand, an analyst at Barclays Plc in London. He estimated that Heineken paid 10.5 times Ebitda for Femsa’s beer unit, which SABMiller rejected.
“SABMiller is very focused on returns, which they’ve shown in the past by walking away from high profile deals,” said Jason DeRise, a London-based analyst at UBS AG. SABMiller also passed on Heineken and Copenhagen-based Carlsberg’s purchase of Scottish & Newcastle in 2008, which was struck at an Ebitda multiple of 23.1 times, data compiled by Bloomberg show.

Return on Equity
SABMiller’s reliance on joint ventures in its push into emerging markets such as Latin America and Africa, where the costs can be higher because of less-established infrastructure and distribution networks, may have eroded profitability.
Its return on equity, a measure of how much a company earns for each dollar it invested, has fallen in four of the last five years to 10.8 percent in 2010, data compiled by Bloomberg show. That’s about half the return of the 21 percent it generated in 2005.
On average, SABMiller had a return on equity of 12.1 percent in the past five years, versus 12.9 percent for AB InBev, the world’s largest brewer, and 17.2 times for Heineken, the third-biggest beer company, the data show.
While buying the Australian maker of Victoria Bitter and Pure Blonde would increase the proportion of SABMiller’s sales in developed markets that are growing slower than emerging nations, it may also boost the company’s overall profit margins.

Beer Margins
Foster’s beer business had an operating profit margin of about 38 percent in the 2010 fiscal year, the company said in a presentation to investors this month. That’s higher than any independent brewer with annual revenue of more than $1 billion, data compiled by Bloomberg show.
The profit margin of 22 percent for SABMiller trails Leuven, Belgium-based AB InBev, who boosted its margins by more than 2 percentage points to almost 28 percent in 2009, the year after its purchase of Anheuser-Busch, Bloomberg data show.
SABMiller is more likely to pursue a deal because it is less indebted than its competitors, according to Anthony Bucalo, an analyst at Credit Suisse Group AG in London, while rivals seeking acquisitions may be less interested in Foster’s.
SABMiller’s net debt to Ebitda ratio will drop to 1.6 this fiscal year and 1.1 in 2012, less than half the ratio of 2.5 in 2009, analysts’ estimates compiled by Bloomberg show. AB InBev will have net debt of 2.3 times Ebitda this year, while Heineken will have a ratio of 2, the data show.

Global Domination
Asahi Breweries Ltd. of Tokyo, which will “aggressively seek acquisitions and alliances” this year, isn’t interested in Foster’s because it’s too expensive, President Naoki Izumiya said this month at a news conference, according to the Age newspaper. Asahi may spend as much as 400 billion yen ($4.9 billion) to buy companies by 2012, Izumiya said Feb. 8.
SABMiller wants to “take over the world, don’t they?” said Andy Ford, an analyst at MF Global in London. “They’ll end up doing it especially if there aren’t that many people looking at it as they’d get it for a good price,” he said, referring to a purchase of Foster’s.
Elsewhere in mergers and acquisitions, Enterprise Products Partners LP, the biggest U.S. pipeline partnership, offered to reacquire former subsidiary Duncan Energy Partners LP in an all- stock deal that values the company at $2.41 billion.
Duncan Energy holders would get 0.9545 unit of Enterprise for each unit they own, under the proposal made to the board of Duncan Energy’s general partner, the Houston-based companies said yesterday in separate statements.

Valero, Chevron
Valero Energy Corp., the largest U.S. oil refiner, is in talks to buy San Ramon, California-based Chevron Corp.’s U.K. refinery for $1 billion to $1.5 billion, according to two people with knowledge of the matter. An agreement may be reached as soon as next month, said one of the people, who declined to be identified because the discussions are private.
Chevron has been seeking a buyer for the Pembroke refinery in Wales, its only remaining European plant, for almost a year. It’s unclear whether there are other bidders for the asset besides San Antonio-based Valero, and talks could still break down, the people said.
There have been 3,451 deals announced globally this year, totaling $333.3 billion, a 34 percent increase from the $248.5 billion in the same period in 2010, according to data compiled by Bloomberg.