SABMiller, the world’s second-largest brewer by volume, will pursue Foster’s Group after its A$9.5 billion ($10 billion) cash offer was rejected by Australia’s biggest beer company.
The maker of Peroni said today that it will “continue to seek engagement” with Melbourne-based Foster’s, which last month spun off its wine unit to focus on beer. Foster’s rose 14 per cent to A$5.14. SABMiller offered A$4.90 a share, or 8.2 per cent higher than yesterday’s closing price.
The bid may spark a takeover battle for Foster’s. Japan’s Asahi Breweries and Mexico’s Grupo Modelo SAB de CV are among rivals that may make offers, according to analysts. SABMiller may have to raise its bid by about 13 per cent based on the price paid by Kirin Holdings Co for Lion Nathan Ltd, Australia’s second-largest brewer, in 2009, said Dirk Van Vlaanderen, an analyst at Jefferies International in London.
“We expect SABMiller to return with a higher bid,” Andy Bowley, an analyst at Citigroup, said in a note today. “SABMiller remains the most likely acquirer of Foster’s.”
SABMiller shares fell as much as 3.6 per cent and were down 3.3 per cent at 2,110 pence as of 11.43 am in London. The gain in Foster’s shares was the steepest in more than 25 years.
Including debt, the bid is worth A$11.2 billion, SABMiller said. The offer values Foster’s at 11.8 times the A$948 million in earnings before interest, tax, depreciation and amortisation that the company’s beer division posted last year. Kirin said it paid 13.8 times Ebitda for the 54 per cent of Lion Nathan it didn’t already own in 2009.
COMPARABLE DEALS
“We suspect the Kirin/Lion multiple will represent the board’s benchmark for a accepting a revised or alternative bid,” Citigroup’s Bowley wrote. That would equate to a range of A$5.40 to A$5.50 a share, or 10 per cent to 12 per cent above the rejected bid, he said.
SABMiller’s offer is 10 per cent higher than the Foster’s average trading price in the 20 trading days through yesterday. That compares with an average of about 13.4 per cent for brewery deals pending and completed in the past five years, according to data compiled by Bloomberg.
“There’s room to go higher if you compare them to some recent deals,” said Will Seddon, who helps oversee more than $350 million at White Funds Management in Sydney. “There have been a whole lot of transactions in that space in recent years, many of which were done at pretty high multiples.”
Heineken and Carlsberg paid 23 times Ebitda for the United Kingdom’s Scottish & Newcastle Plc in 2008, Bloomberg data shows.
A takeover of Foster’s by SABMiller would be the biggest acquisition of a brewer since InBev NV acquired Anheuser-Busch Cos for $52 billion in 2008.
Modelo, the maker of Corona beer, is also interested in Foster’s, a person with knowledge of the matter said earlier this month. The Mexican company, in which Anheuser-Busch InBev AB owns a 50 per cent non-controlling stake, discussed with its board a proposal to make a joint bid for Foster’s with Molson Coors Brewing Co, the person said.
SABMiller Chief Executive Officer Graham Mackay said on a webcast today that he had no information on possible counter-bidders. A spokeswoman for Anheuser-Busch InBev declined to comment on whether the world’s largest brewer would bid for Foster’s. Heineken said it doesn’t comment on competitors’ acquisition plans.
An acquisition of Foster’s would be SABMiller’s biggest, giving the maker of Grolsch about 50 per cent of Australia’s beer market, including the top-selling Victoria Bitter.
PROFIT MARGINS
The planned transaction would boost the company’s overall profit margins. Foster’s beer business had an operating profit margin of about 38 per cent in the 2010 financial year, the company said in a presentation to investors in February. That’s higher than any independent brewer with annual revenue of more than $1 billion and compares with SABMiller’s profit margin of 22 per cent, data compiled by Bloomberg show.
Acquiring Foster’s would give SABMiller access to a ‘resilient’ economy in Australia, with increasing disposable income, CEO Mackay said on the webcast. The company has a ‘sound understanding’ of the Australian market, he said, and can improve revenue growth by selling more higher-priced beer.
SABMiller said the proposed takeover will be funded from existing resources and new debt facilities. The brewer’s net debt to Ebitda ratio would increase to 3.6 times from 1.3 times, according to estimates by Ian Shackleton, an analyst at Nomura International in London.
“This raises some question marks about whether the company will issue equity in the medium-term,” Shackleton wrote.
JOINT VENTURE
SABMiller said it hired JPMorgan Chase & Co, Moelis & Co, Royal Bank of Scotland Group and Morgan Stanley as advisors.
The brewer, which started in 1895 selling beer to gold prospectors in South Africa, became SABMiller after South African Breweries Plc bought Miller Brewing Co for $5.6 billion in 2002, data compiled by Bloomberg show.
SABMiller already has a beer business in Australia through its Pacific Beverages joint venture with Coca-Cola Amatil Ltd, the nation’s biggest soft drink maker.
Earlier today, Coca-Cola Amatil amended the venture to enable SABMiller to bid for Foster’s and buy out the Coke bottler’s share of the business for as much as A$380 million.
Sydney-based Coca-Cola Amatil also gets the right to buy Foster’s spirit, pre-mixed drink and non-alcoholic beverage operations in Australia as well as the its brewing operations in Fiji from SABMiller if a takeover is completed.
Foster’s Chief Executive Officer John Pollaers is introducing new brands to appeal to younger consumers and win back customers who switched to sweeter drinks like pre-mixed spirits. He ran the beer unit for 13 months before the company last month completed the spinoff of its wine unit.
Pollaers wants to boost Foster’s share of faster-growing craft and premium labels with brews such as Fat Yak and reduce its reliance on stalling labels like Victoria bitter.
