SABMiller bids for Foster’s
Finally! An official offer for Foster’s Group. After what has been the longest rumoured takeover in the history of the brewing industry, SABMiller is the first to come out of the woodwork. At the end of June 2011the world’s number two brewer made an AUD 9.51 billion (USD 10 billion) all-cash takeover offer for Foster’s, which was immediately rejected by Foster’s board. Foster’s thinks the offer undervalues the company.
SAB’s first offer is AUD 4.90 per share – less than Foster’s share price which jumped to AUD 5.14 on the day the offer was made as hedge funds and day traders clamoured to get into the stock, betting that SABMiller will return with a higher offer of at least AUD 5.50 per share.
Australian media say that the Foster’s camp is privately flying a flag of about AUD 5.90 or AUD 6, which implies a middle ground of AUD 5.50 per share. The Foster’s team points to Kirin’s takeover of Lion Nathan in 2009, which represented an EBITDA multiple of 15.6 times and which, if applied to Foster’s, would produce a price close to AUD 6 to support the claim that the offer price is too low.
But the Foster’s board will need to be careful it doesn’t get too greedy given its shareholders have had a horrid time over the past few years and will be looking for an exit - at a decent price.
"We note the rejection of our proposal by the Foster’s board," SABMiller CEO Graham Mackay said tersely in a market briefing. He added: "We seek to continue to engage for the purposes of understanding their perspective on value."
Even if SABMiller is the only bidder for Foster’s, the takeover could still drag on for months. SABMiller will probably wait until August and the release of Foster’s full-year profit figures before deciding whether to increase its bid.
Actually, what SABMiller is offering isn’t peanuts. At an enterprise value of AUD 11.2 billion (equity plus debt), SABMiller’s bid for Foster’s is already at 12.5 times EBITDA. That’s more than Heineken paid for FEMSA in 2010 (11.2 times EBITDA).
In theory, SABMiller could afford such a steep price tag. The brewer’s total debt, currently at 1.5 times SABMiller’s EBITDA, can be raised easily and still not give it too much of a headache.
However, SABMiller cannot afford to pay significantly more without sacrificing its reputation for acquisition discipline. What is more, several of SABMiller’s big shareholders are already quite unhappy with the brewer going after Foster’s. Having previously convinced them that emerging markets are the place to seek growth, SABMiller’s CEO Graham Mackay is having a hard time persuading them that changing tack to mature markets makes more sense.
The question remains of whether Foster’s business warrants such a huge outlay for any predatory brewer. Foster’s may be the market leader in Australia with high profit margins (38 percent as measured in EBIT). But Foster’s market share and volumes have been in decline for some time, which makes Foster’s look like the very definition of a mature business. Also, there are limited opportunities to cut costs at Foster’s.
SABMiller has got to know the Australian market well through its Pacific Beverages joint venture with Coca-Cola Amatil (CCA), so it should have a good idea of the turnaround potential in Foster’s business.
In order to extract itself from the joint venture with CCA, SABMiller has reportedly agreed to pay Coca-Cola Amatil up to AUD 380 million for its stake in the joint venture - provided SABMiller is successful in its bid for Foster’s. Obviously SABMiller will have to factor in that sum in its total expenditure for Foster’s.
Whatever the outcome, it looks like we could be in for a protracted takeover saga.
