Glass still half-empty for SABMiller’s move on beer market leader Foster’s

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SHAREMARKET traders pushed Foster’s share price up another 1 per cent yesterday in anticipation of a bid bump from London-based SABMiller, but with the shares now 30 cents above the London-based group’s initial $4.90 a share proposal, caution is needed.

SABMiller needs to go higher to get Foster’s talking, that’s for sure.

But judging from the way SABMiller chief executive Graham Mackay’s briefing went down on Tuesday night our time, there’s not much appetite in the brewing behemoth’s home market for a large increase.

Advertisement: Story continues below The analysts who attended the SABMiller briefing were polite, but sceptical, about the logic of a Foster’s acquisition and that was reflected in a 3.6 per cent slide in SABMiller’s share price, on a day when the London market rose 1.44 per cent.

Mackay partly set himself up for the reaction by basing his presentation around an assessment of Foster’s and its home market that damned them with faint praise.

Australia was a fast-growing economy by Western standards that was hooked into the Asian boom (Foster’s if acquired will be part of SABMiller’s Asian division).

He said beer profit margins here were high and Foster’s was the market leader.

But Mackay also noted that Australian beer consumption per capita had been falling for years – it had halved since the mid-’70s and was now back to levels seen in the late 1940s – and said beer’s 44 per cent share of alcohol consumption in Australia was well below shares of 55 per cent in the US, 51 per cent in Canada and 49 per cent in Britain.

Beer had ”lost incremental drinkers and occasions”, he said, and on top of that, alcohol’s overall share of Australian household spending has declined by about 40 per cent since 1981 to about 2 per cent, compared with 3.6 per cent in Britain.

Mackay said SABMiller believed alcohol’s share of the Australian purse had stabilised, but he also acknowledged that Foster’s was operating in a mature market.

This puts the deal Mackay wants to do at odds with SABMiller’s core strategy of leveraging its revenue and profit growth by taking exposure to emerging regions and beer markets, such as China, where its Snow brand is the market leader.

In the briefing, Mackay edged his way around that logical redoubt by arguing that Foster’s was underperforming.

The Australian group had ”sub-optimal” brand positioning, including overlapping brands, and a ”mixed” record on innovation, he said.

And while it had seven of the top 10 brands in the Australian market, it had not been able to develop them and had seen its market share decline from 54 per cent to 50.3 per cent between 2005-2006 and 2009-1010, albeit with 2 percentage points of that coming from the loss of the Boags stable to Lion Nathan.

He said SABMiller, five times as large, would deliver operational economies of scale, in purchasing, for example.

But the key was that his company would boost Foster’s profits in a stagnant market by segmenting consumers, channels and occasions and tailoring the beers it offers to fit them.

In essence then, Mackay is arguing that he will do what Foster’s own chief executive, John Pollaers, also aims to do – improve Foster’s beer volumes faster than the market overall and reclaim market share.

In the briefing, analysts questioned the apparent mismatch between SABMiller’s existing strategy of focusing on emerging markets that offer high beer volume growth with the mature market Foster’s now operates in.

Mackay’s answer, that even after a Foster’s acquisition three quarters of SABMiller’s profit would come from emerging markets, didn’t address that issue and he acknowledged that even if his renovation of Foster’s worked, Foster’s would not build beer volumes as quickly as the group as a whole.

Analysts also asked whether SABMiller could boost Foster’s profitability without destabilising what has been a very cosy pricing environment in this country.

Beer prices here have tended to outpace inflation. The reverse is the case in SABMiller’s other markets and as one analyst put it, if it wants to boost Foster’s market share, SABMiller might need to either price its beer more aggressively or spend more on marketing.

Either would squeeze profit margins and profits would only rise if the volume gains they produced outweighed the cost.

SABMiller needs to offer more to get Foster’s onside and conduct confirmatory due diligence that among other things will determine how secure Foster’s’ Corona franchise is if control passes and that there is still room for a meeting of the minds.

The new market price of $5.20 is in earnings multiple terms in line with the price Kirin paid to own Lion Nathan outright in 2009 and SABMiller could pay a bit more and still get an earnings per share uplift because it trades on a higher earnings multiple.

SABMiller is also undervaluing Foster’s recent win against the Australian Taxation Office over claims for tax on transactions in the ’80s and ’90s.

It doesn’t load into the earnings multiple calculation because its not a sustained income boost, but Foster’s will get back $256.7 million it paid the tax office after its court win, claim lost interest and be free to use $447.5 million of tax losses.

The total value windfall is about $750 million and in its takeover sums SABMiller has only recognised the first $256.7 million: room for a rise, then – but judging from London’s reaction, not to around $6 as the Foster’s camp wants.