Bids: Fosters Shares Up On More Turnover

The arguing, or rather debating, over the value of Foster's is now underway in the wake of the $4.90 a share offer from SABMiller.

Foster's and his camp argue its worth more, SABMiller says that's its about right.

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But the reality is that everyone knows that SAB, or someone else will have to lift the price to around $5.50, an increase of around 10%, to get the Foster's board serious.

Fosters shares ran up to $5.23 yesterday from Tuesday's close of $5.14.

The ended at $5.20, up 6c, on turnover of more than 96 million, worth more than half a billion dollars.

That's nearly 200 million shares, worth over $1 billion traded in the last two days.

The closing price values the company at just above $10 billion.

Driving the buying is the expectation of counter bids emerging from the likes of Asahi of Japan, Anheuser InBev, Modelo of Mexico (half owned by InBev), Carlsberg or Heineken. The list isn't that long, but there could be one logical buyer in that group.

Australian analysts say a successful bid is likely to need a price closer to $5.50 a share, with the main worries being the declining beer consumption in Australia and the high level of debt that SABMiller would have after the bid (which will cost very expensive Australian dollars).

Bloomberg said yesterday that a survey of analysts had said SABMiller may have to raise its offer by 8% to $5.30 a share to secure a friendly takeover of Foster's.

Foster's currently controls about 47% of the Australian beer market. It demerged its wine division - now listed as Treasury Wine Estates - last month, a move many analysts had predicted would trigger interest from buyers for both the beer and wine companies.

"While the initial offer price is in line with previous beer transaction multiples, our view was that a price of around $5.50 (12.3 times expected 2011-12 earnings before interest, taxes, depreciation and amortisation) was required to get the board to seriously consider the offer," said Paul van Meurs of Deutsche Bank.

Goldman Sachs (advising Foster's) analyst Ian Abbott said that based on profit forecasts for 2011-12, a proposal of $4.90 per share implied an enterprise value/EBITDA multiple of 11.5 times (or 11 times after adjusting for $400 million in expected tax losses).

"We note that Foster's major competitor, Lion Nathan, was acquired in 2009 by (Japan's) Kirin on an EV/EBITDA multiple of 12.5 times current earnings," Mr Abbott said, implying the initial bid is likely to be raised (as he would).

Credit Suisse analyst Larry Gandler upgraded his Foster's target price to $5.35, from $4.95, but is not convinced other bidders for the brewer will emerge.

"We believe there will be no competing bids based on our assessment of global brewer balance sheets. For its part, SAB Miller is likely to be disciplined.

"It is constrained by the reality that Foster's operates efficient breweries, the Corona licence may not have value for SAB and SAB must pay Coca-Cola Amatil at least $305 million to exit [its Pacific Beverages joint venture]," Mr Gandler said.

Greg Dring of Macquarie in Sydney said: "SABMiller has offered a huge price for Foster's when our estimated revenue and EBIT growth is considered.

"While historic multiples could justify a higher price they don't provide any insight into growth expectations at the time of peer transactions. But SABMiller seems determined to acquire Foster's based on the buyout price of Coca-Cola's equity in the Pacific Beverages joint venture so a 'bump' in the proposal price could be expected," Mr Dring said.

But while local analysts believe the price will rise, the immediate reaction from London-based analysts, where SABMiller is based, was more sceptical.

The "synergies are going to have to be quite large for the deal to wash its face", according to Jonathan Fell at Deutsche Bank in London.

He told the Financial Times that if there's no counter offer he expects the two companies to come to a compromise. "I wouldn't expect Foster's would say yes to the first bid, but I'd be very surprised if both don't move toward some sort of compromise relatively soon."

Some analysts say the deal would help rebalance SABMiller away from its over-dependence on developing markets (which are generating faster sales growth).

If SAB grabs Foster's, its exposure to developed markets will rise from around 15-18% to about 25-30%, depending on which broker you read.

But there are some UK analysts who see the tilt down under as an attempt by SAB to make itself too big a target for the global leader, Anheuser InBev to swallow.

London brokers Collins Stewart were quoted in media reports as saying:

"Our thesis on SABMiller has been that Foster's at the right price is a good deal (and this is broadly at a reasonable price).

"There is a risk to SABMiller that ABI would prefer SABMiller without Foster's, hence bidding for Foster's risks drawing them out.

"At the very least, SAB shareholders should benefit from downside protection in that any negative response in the shares inevitably makes it more attractive to ABI.

"We accept that some will see this as a dilution of an "emerging market" story, but we would buy on this news."

And Citibank's London office was quoted in other reports as saying:

"We don't think SAB could improve FGL's profitability significantly. Margins are already high and costs aren't out of line with equivalent operations elsewhere.

"Furthermore, FGL's brands are well differentiated, with appropriate price points. Lack of geographical overlap/proximity suggests synergies would be limited (although there might be some procurement gains).

"The factors that drove the success of SAB's Colombian acquisition wouldn't apply in Australia; in fact its track record on acquisitions in developed markets is weak."

And The Financial Times' Lex column noted:

"A key reason for SABMiller's interest may be left unsaid. Foster's generates keg-loads of cash - margins are almost 40 per cent - and capital expenditure needs are minimal. SABMiller is relatively cash-poor. Its margins are one-quarter lower and capital expenditure in emerging markets is high.

"The annuity stream from Foster's would be handy. Although Foster's will only add about 15 per cent to SABMiller's top line, it will boost free cash flow by about 24 per cent.

"Sounds great, but the cash flow will come at price. At $4.90 per share, SABMiller's proposal is already a pricey 12.5 times this year's expected earnings before interest, tax, depreciation, and amortisation. But that ignores a recent court ruling which awarded Foster's access to $1.5bn of tax losses (although the tax office could appeal).

"Shareholders expect more - Foster's share price has settled 5 per cent higher than the proposal price. If SABMiller really wants to win, it would do well to oblige them before other bidders emerge."

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