Bid could turn hostile in a trice

SABMiller share falls as Foster’s bid rejected

LIQUOR NEWS

MoneyWeb - Jun 21st 2011, 00:00

JOHANNESBURG - The SABMiller share price dropped R8.40 or 3.5% to R234.70 hours after the board of Foster’s, the iconic Australian brewer, rejected SABMiller’s A$11.2bn bid. 

Foster’s share price, by contrast rose 13% to A$5,14, a premium to the A$4,90price bid by SABMiller.

The premium suggests either that the Australian market expects a higher bid from SABMiller or a competitive bid. Commentators on Bloomberg television suggested that Heineken or Coors could make a move.

It is quite normal for the share price of a predator in a bid to decline and for the target to rise.

SABMiller said it would continue to “seek engagement” with Foster’s board. But with SABMiller trumpeting its own superior management and slighting that of the Australian target, it appears that the bid could turn hostile in a trice.

In a presentation to analysts in London, SABMiller CEO Graham McKay praised the Australian economy and its “stable and profitable beer market”.

The number one (Foster’s) and two players commanded 92% of the market, he said. The industry’s long-term growth trend was 0.5% pa. Per capita consumption was 84 litres a year. This is declining but is offset by population growth.

McKay said beers “share of throat” had stabilised after losing ground to wine and spirits. It was low by the standards of the US, Canada, the UK and SA. Other positives were that the Australian market has the world’s 7th biggest profit pool. And that beer is highly affordable. Liquor accounts for less than 2% of Australian consumption expenditure.

He said Foster’s mainstream brands were under performing and needed reinvigoration.

He said Foster’s represents an opportunity to improve financial and operating performance.

In its recent interim results Foster’s reported “good progress” after hiving off wine assets –but there was retrogression in the most vital numbers. Sales were down 6.6%, net profit by 7.5% and earnings a share 7.7%.

In its year to March, by contrast, SABMiller published sparking numbers – lager volumes up 2% to 218m hectolitres, revenue up 7%, adjusted earnings up 19% in US dollars – and free cash flow up 23% to $2,488bn.

This bid is twice the size of anything that SABMiller has attempted before. It is an all-cash deal so unless there is a capital raising, a successful deal could stretch the balance sheet. Last balance sheet SABMiller had net debt of $8.6bn ($9.2bn) against equity of $20.6bn ($16.1bn). Interest cover by operating profit was 4.6 (4.4).

McKay said SAB could enhance beer relevance and manage the drivers of veer’s share of alcohol. It would target rands more precisely to distinctive consumer groups. It would improve on-premise appeal to consumers, optimise distribution, sales service and trade marketing and improve efficiency.

The Sydney Morning Herald said SABMiller was unlikely to be deterred by the Foster’s board rejection. It quoted analyst Paul Xiradis of Ausbil Dexia as saying “it’s game on and other bidders could potentially be interested”.

The newspaper invited readers to vote on the proposal. More than 700 voted and 47% said they had “no objection – it’s up to the market to decide”. Some 32% were opposed, 13% unsure and 8% said it was too early to take a view.

In its Sens announcement, SABMiller said the Australian economy is highly attractive but said Foster’s had lost market share and “share of wallet”.

It said it had a proven track record and that it would use its expertise, best of practice, its superior management and its global scale to enhance Foster’s leadership position.

SABMiller said the deal was worth A$11.2bn. It said that was a premium of 14.5% to the price of $4.28 and an 18% premium to the price on May 25, the day Foster’s announced the demerger of its wine interests.

Bloomberg and the Sydney Morning Herald priced the deal at A$10bn and said it was a premium of only 8% to yesterday’s price. That led them to say that the offer was too low.

SABMiller stressed that it was a non-binding conditional proposal subject to satisfactory due diligence. Before it announced the proposal, SABMiller had to arrange the purchase of shares held in Pacific Beverages by Coca-Cola Amatil.