SABMiller May Struggle to Increase $10 Billion Foster’s Bid on Few Savings

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SABMiller Plc (SAB), whose A$9.5 billion ($10.2 billion) offer for Foster’s Group Ltd. (FGL) faces resistance from the Australian brewer, may find its ability to pay more hampered by a paucity of cost savings.

The maker of Peroni should be able to cut A$150 million of costs at the Melbourne-based beermaker in the six years after a deal, according to the median estimate of nine analysts surveyed by Bloomberg. That would be proportionally less than the $2.25 billion of savings expected to be generated by InBev NV’s $52 billion takeover of Budweiser maker Anheuser-Busch Cos. in 2008.

Foster’s shares are trading 5.9 percent above the A$4.90 a share offer as investors bet on a higher bid. Were SABMiller to raise the offer to yesterday’s closing price of A$5.15 a share, it might have to derive the equivalent of A$322 million of savings to meet its goal for return on capital from the deal, according to Martin Deboo, an analyst at Investec Securities in London. That may be a big ask, even for a company renowned for improving the operating performance of acquired businesses.

SABMiller’s ability to make savings from buying Foster’s is “certainly not the same sort of situation as Bud was. Bud was really flabby,” said Jonathan Fell, an analyst at Deutsche Bank AG in London. “I’m sure there are things SABMiller can do to improve Foster’s, but it’s not at the same level as Bud was.”

Big Margins
Buying a business that already has among the highest margins of all the major brewers means it may be difficult for SABMiller to make major improvements. Foster’s beer business had a margin, which measures earnings before interest and taxes as a proportion of revenue, of 37 percent in the 12 months ended June 2010, the highest of any independent brewer in the world.

“This isn’t as obvious a situation as a brewer in a market buying out another brewer with some overlapping breweries,” said Carl Short, an analyst at Standard & Poor’s in London. “Given where they’re starting from with the Ebitda margin being as high as it is, is there a natural ceiling?”

SABMiller may be able to increase margins at Foster’s by raising beer prices, Short said. “The bigger global player is bringing some of their expertise, not just in production, but also in revenue management, to the indigenous player. That’s what SABMiller’s going to be looking to bring to Foster’s.”

Share Performance
Foster’s shares rose 0.8 percent to A$5.19 at the 4:10 p.m. close of Sydney trading. The stock has surged 15 percent since June 20, the day before the brewer disclosed the bid.

Cost-cutting avenues open to SABMiller might include closing the Australian company’s Abbotsford brewery in Melbourne in favor of a cheaper location, as well as saving cash by group procurement of ingredients and packaging, analysts said.

Still, any margin improvements may be weighed down should SABMiller increase advertising and promotional investments at Foster’s to boost the Australian brewer’s revenue.

SABMiller has said it can improve sales at Foster’s, which has endured years of market-share decline, though still controls about half of the country’s beer market. Australia has among the highest level of beer consumption in the world, which may restrict potential sales improvements, said Trevor Stirling, an analyst at Sanford C. Bernstein in London.

Foster’s presents “significantly” lower sales-growth opportunities than were available to Heineken NV (HEIA) from its acquisition of the beer unit of Mexico’s Fomento Economico Mexicano SAB in April last year, Stirling said. Heineken beat off competition from SABMiller for the Mexican brewer.

Emerging Markets
“The market is a bit skeptical about how much of the synergies SABMiller say they’re going to get will be revenue- driven,” said Deutsche Bank’s Fell.

Buying Foster’s would also reduce the proportion of profit that SABMiller gets from developing countries, which Stirling said is a concern to “a sizable number” of its shareholders.

The world’s second-largest brewer by the amount of beer sold gets about 84 percent of earnings from emerging regions, which helped it improve volume sales last year compared with declines excluding acquisitions at smaller rivals Carlsberg A/S and Heineken. Adding Foster’s would reduce the proportion to about 74 percent by 2014, Stirling estimates.

While SABMiller may struggle to justify raising its offer, it is unlikely to succeed without doing so. The bid for Foster’s represents about 12.5 times the brewer’s estimated 2011 earnings before interest, tax, depreciation and amortization, a lower multiple than the 13.3 times average of brewing mergers and acquisitions since 2000, according to analysts at Investec.

Higher Bid?

“I’d be surprised if they gained the Foster’s board’s approval at the current price,” S&P’s Short said. “It seems clear to me that SABMiller would very much like this to be an agreed deal. To get that, they would have to be a bit more generous than the opening gambit.”

Still, Deutsche Bank’s Fell said he has “few doubts about SAB’s ability to make the transaction an operational success.”

The brewer has a “strong record of improving the operational performance of acquired companies,” analysts including Andy Ford at MF Global in London wrote in a note.

“This is a deal that if they can get done at an attractive price, it’ll be a component to the SABMiller overall growth story,” said Thomas A. Russo, a partner at Gardner Russo & Gardner who holds about $300 million of SABMiller shares.