Doubts over SABMiller bid for Fosters

As the drinks business reported this week, SABMiller is said to have cleared corporate obstacles that might prevent it from bidding for Foster’s, Australia’s drinks giant, whose shares have put on 5% this week. But is such a bid likely? The jury is out.

Why would the London-listed global brewer clear the decks if it was not gearing up to pounce? On the other hand, analysts are far from convinced that SABMiller would benefit much from doing so, apart from increasing its size and planting a flag in the Pacific.

The actual profit potential from synergy savings is marginal, especially in Australia, which is a developed market.

Figures from Evolution Securities point to Australia being five times more profitable per hectolitre of beer than the UK, but Foster’s share price is already discounting a fully priced bid of about $11.5 billion and that includes the troubled wine interests, Treasury Wine Estates, which encompasses the Rosemount, Penfolds, Wolf Blass and Wynn’s labels.

Could rivals be tempted into the fray and flush out SABMiller? Some speculate that Japan’s big brewers, themselves struggling with static home markets, might be interested, but they have never made a success of overseas acquisitions and would face the same lack of cost-saving opportunity as SABMiller.

However, the cost of capital to the Japanese is minimal and the desire to do something – anything – to revive their businesses is strong.

Foster’s shareholders would love a premium to the present share price, which is almost 10% below where it stood last summer when the group said it was considering splitting the beer and wine arms into two separately listed companies, so divergent were their prospects and calls on capital.

However, it is hard to see anyone paying a premium price after Foster’s announces its six-month figures in a couple of weeks’ time. They are likely to be less than buoyant due to the floods and other recent natural disasters in its home market.

Even more depressing is that the potential value of Treasury Wine Estates has probably decreased since Foster’s turned down a £1.7bn bid from Cerberus Capital, the US investment group, in the autumn.

Analysts calculate that the beer division is worth about $10bn, which at Foster’s present share price puts a value of just $1.5bn (£1bn) on Treasury. Foster’s said the Cerberus offer undervalued Treasury but the Americans have made no further move. Perhaps they think they are now in a buyers’ market.

However, the Foster’ s board has this week acted to secure Treasury’s vital supplies of New Zealand wine by lifting its stake in Rapaura Vintners to 50%.

The popularity of Sauvignon Blanc, which now outsells Chardonnay in Australia, means secure sources in Marlborough are essential. Rapaura is a key supplier to international markets with the capacity to package 11m cases a year.

That may help improve the prospects of a bidder for Treasury, but the Foster’s board has a delicate balancing act to perform on 15 February.

Assuming that Foster’s announces the split of the beer and wine arms (watch the share price fall if it doesn’t), the best prospect of attracting a premium bid for the beer division is to have it carry as little debt as possible. But that would mean saddling Treasury with extra burdens and making it less attractive.

Could Foster’s announce a final solution with offers for both divisions on 15 February? Stranger things have happened.

Finance on Friday, 28.01.2011