SAB/Foster’s: SABMiller's A$11.2 billion ($11.8 billion) approach to Foster's Group is unlikely to be its last. The UK-listed brewing giant will have to dangle more to win a recommendation from its Australian target, whose shares jumped 5 per cent above the A$4.90 being offered. But SAB cannot afford to stretch too far.
Foster's has undeniable charms for a global brewer like SAB, starting with its 50 per cent share of a highly profitable market. Foster's 38 per cent operating margins are more than twice SAB’s. There's even room to improve on that. As half of a cosy duopoly, Foster’s has grown fat. A new, unproven chief executive gives further grist to SAB's opportunistic mill.
Funding an all-cash offer would be simple enough. Of the global brewers, only SAB and US brewer Anheuser-Busch Inbev can raise the requisite cash without issuing equity, or taking net debt beyond a comfortable 3.5 times Ebitda, say Credit Suisse research. So SAB could conceivably stretch to $13.8 billion - implying a share price 30 per cent above its current offer.
Still, while SAB has the firepower, a substantially higher bid isn't easy to justify. Foster's may be inefficient, but there is little scope for synergies given SAB’s paltry 1.5 per cent share of the Australian beer market. Based on Foster’s forecast operating profits for 2012, the post-tax return on investment a year from now would be a meagre 5.5 per cent.
The maths might change if SAB could work some operational magic. Slashing Foster's marketing budget from 10 percent of sales to SAB's 8 per cent would also help. And repositioning Foster's towards so-called “new-style” low-carb beers, where AC Nielsen sees Australian volumes growing at 17 per cent, would offset the slow decline for traditional beers like Foster's Victoria Bitter. Assume SAB can grow Foster's revenues by 7 per cent for the next two years, and widen margins by four percentage points. It could eventually squeeze out a post-tax return somewhere close to Foster’s 8.5 per cent cost of capital.
Foster's appeal is all too visible to other global brewers. Japanese peers Asahi and Suntory may want to follow rival Kirin, which took over Australian number-two Lion Nathan in 2009. Mexico’s Modelo has might also be interested, though 50 per cent shareholder AB Inbev might have other ideas. But with AB Inbev still digesting past deals, SAB looks like the lead cash cash bidder. That just leaves Foster's board - and the market - to win over.