It would seem the global beer industry knows when to say when.
SABMiller’s $10.5 billion takeover offer in June sent Foster’s Group Ltd. shares surging, as eager investors in the Australian brewer waited for a higher offer or a white knight. Neither has materialized. Foster’s shares, which reached 5.23 Australian dollars (US$5.78 at current rates) on June 22, have fallen back to A$5.05, hitting a post-offer low of A$4.98 on Friday and edging back to the A$4.90 a share bid price.
Industry observers now say that a big new bid is unlikely. Other suitors are too small or too busy on other projects, they say. Meanwhile, Foster’s has vigorously defended its independence, while SABMiller may have good reason to wait before springing its next move.
Some analysts also say Foster’s presents a challenge for potential suitors, as any effort to turn around years of slow growth in its home market could eat into its profit margins.
“We believe there will be no competing bids based on our assessment of global brewer balance sheets,” said Credit Suisse analysts in a research note.
Foster’s continues to insist the SABMiller bid is too low. On Friday, Chief Executive John Pollaers said there had been no engagement with SABMiller since the approach was made. SABMiller has said it will continue to seek talks with Foster’s.
Australian brewer Foster’s is trying to fend off a takeover attempt. The number of potential bidders in the brewing world isn’t big. Credit Suisse says that among the few that could fund a deal are Grupo Modelo of Mexico and the world’s biggest brewer by volume, Anheuser-Busch InBev.
But they are unlikely to bid due to competitive issues, an interest in other targets or a focus on bulking up in emerging markets.
In Japan, Asahi Group Holdings Ltd. has growth ambitions and an existing tie-up with Foster’s to market Asahi’s flagship beer in Australia. But its market capitalization is roughly equal to Foster’s, and a Tokyo-based banker says most Japanese lenders would not be willing to fund such a large acquisition. Also, Japanese accounting rules mean that Asahi would have to amortize a large amount of goodwill swiftly, making the deal less attractive.
Asahi is already seeking a stake or a controlling position in smaller New Zealand-headquartered Independent Liquor Ltd. instead. It has already submitted a competing bid against Japanese rival Suntory Holdings Ltd., and final bids are due Thursday, said a person familiar with the matter.
If no competitor emerges, SABMiller may wait until Foster’s full year results are unveiled on Aug. 23 before reviewing its offer so that it can get more detail on its target. “We believe SABMiller is in this fight for the long haul and is strongly motivated to make this deal happen,” said David Thomas, an analyst at broker CLSA Asia-Pacific Markets in a note.
Many analysts expect SABMiller to eventually raise its offer after Foster’s results are released, but only marginally. At about 12 times Foster’s prospective full year core earnings, SABMiller’s offer is roughly in line with past brewery deals, according to analysts. The average brewery deal has historically been struck at about 11 times core earnings, they said.
If a deal does happen, Citigroup analysts question how SABMiller will maintain the profit margin at Foster’s beer business while reinvigorating growth. The Australian beer market has been roughly flat in terms of volume for nearly a decade, but Citi cites a roughly 40% operating margin at Foster’s Carlton United Brewers due in part to less competition.
Foster’s and the No.2 brewer in the market, Lion Nathan, have raised beer prices above inflation for 15 of the last 17 years. But in recent months beer sales volumes have slipped and supermarkets have been slashing prices.
UBS analyst Naomi Takagi says Foster’s has been losing market share in recent years and to defend itself has cut wholesale prices of premium brands. A spokesman for Foster’s said its wholesale price agreements with customers are confidential.
Takagi says if SABMiller wins control of Foster’s the buyer is more likely to work on building brands by careful targeting of customers rather than heavily discounting products to achieve growth. “If SABMiller enters the market, the focus should shift from price to brand,” said Takagi.
And that means Australians may see an end cheaper beer prices if SABMiller wins Foster’s.