- SABMIller makes initial approach to Foster's - Brokers expect the offer will need to be increased - Ratings and targets unchanged given uncertain situation

By Chris Shaw

After spinning off its wine assets Foster's Group ((FGL)) has only been a separate entity for a short time, but global brewer SABMiller has wasted no time in making an approach. Yesterday, SABMiller announced a $4.90 per share proposal for the Australian brewer that was quickly rejected as inadequate by the target's board.

When looking at the approach from SABMiller, Citi suggests there is potential for counter bidders as several of the larger global beer players would be interested in Foster's at the right price. But given the size of the rejected bid and funding issues for some in the market, Citi's view is SABMiller is the only realistic bidder.

In the absence of any rival bid, Citi expects SABMiller will be patient in its approach with Foster's. This suggests the end play could take months rather than weeks, with Citi expecting SABMiller will need to raise its bid to at least $5.25-$5.35 to engage the board at Foster's. A price of $5.50 or above may be needed for any bid to be successful in Citi's view.

Whether that is a level at which Foster's would accept the approach is unknown, but Credit Suisse agrees with the assessment SABMiller will need to raise its bid at least once or twice for any chance at success.

SABMiller would be able to increase its offer and still have the deal be a positive on Credit Suisse's numbers, though the fact SABMiller would need pay Coca-Cola Amatil ((CCL)) a fee to exit an existing joint venture will limit the amount by which the bid can be raised.

Deutsche Bank agrees with the assessment a higher bid will be required, also suggesting a price of around $5.50 per Foster's share will likely be needed. For Deutsche, SABMiller acquiring Foster's is not a play on volumes but is based on the view profitable growth would still be possible.

Macquarie estimates the current offer would be around 3% earnings accretive for SABMiller in FY12 and FY13, with little scope for volume growth, but expectations of creating value through improved marketing and leveraging SABMiller's global scale.

The offer of $4.90 per share is a huge price in Macquarie's view, especially when assessing estimated revenue and earnings growth for Foster's. Despite this, an increased offer appears likely given SABMiller appears determined to acquire the Australian brewer.

There have been no changes in price targets for Foster's on the back of the approach by SABMiller, the FNArena database showing a consensus price target of $4.88, which supports the Macquarie view Foster's is fully valued at present.

With the corporate action in its early stages ratings are also unchanged, Foster's scoring six Holds and one Underperform. BA-Merrill Lynch has moved to a No Rating on news of the approach (as is the standard response at BA-ML).

Shares in Foster's today are stronger and as at 12.00pm the stock was up 7c at $5.21.