Fosters: Australian for beer

If you ask an Australian to do something he doesn’t want to, his likely response will be: “Get stuffed!” Though the response from Australian brewer Fosters to world number two beer maker SABMiller’s almost US$10bn offer for the antipodean company was worded more politely – but boils down to the same thing.

It’s not the response SABMiller was hoping for after making the biggest bid in the brewing industry worldwide since 2008 and it now brings firmly into the open a deal speculated about for the better part of the past year. It raises the possibility of a bidding war for the firm that already owns 7/10 of Australia’s top beer brands. According to data from Dealogic, a deal of this size would be the fifth biggest in brewing history.

Despite Fosters’ rebuttal, SABMiller isn’t being dissuaded from pursuing the first big international beer deal since global arch-rival Heineken bought Mexico’s FEMSA last year.

“We continue to believe the proposal price is attractive and offers good value to Fosters’ shareholders,” says SABMiller CE Graham Mackay.

The fact that SABMiller is looking at another developed market asset after the trying integration of Miller in the United States is somewhat surprising at first. “I don’t see why they would want to do it,” says analyst Chris Gilmour at Absa Investments. “It has to be part of a bigger strategy to make it harder for one of the other beer majors to make a bid for it.”

It could also be part of a drive to diversify from its strong emerging markets earnings stream. SABMiller generates 80% of its global profits from emerging markets relative to the 50% of its peer group. It’s the world’s specialist in emerging markets brewing and that’s where its core strengths lie. Despite the fact Fosters is located in a highly developed market it has one particular quality sought by SABMiller: it’s massively profitable, with margins around 45% – something Mackay says the group can improve on through implementing its legendary processes and efficiencies.

Trading activity in the immediate aftermath of SABMiller’s A$4,90/share approach saw the stock run above A$5,10, suggesting the market believes a higher offer – if not from SABMiller then another global major – is possible.

Part of SABMiller’s approach is it can do the deal quickly and cleanly and isn’t dependent on raising capital from shareholders, as it will use existing debt facilities to fund the transaction. But a statement from Melbourne-based Fosters stated bluntly the 8,2% premium was insufficient and undervalued the company. Fosters is clearly in less of a hurry than SABMiller, which is keen to tie down a deal as quickly as possible.

South African companies have a notoriously patchy track record in Australia and its regulators have made it difficult for offshore investors to conduct deals the country believes aren’t in its interest. At the time of writing, Australia’s authorities had made no comment on whether they would be supportive of a transaction that would see control of one of the country’s most globally recognised brands wrested from Australian control. Earlier this year Fosters separated its beer and struggling wine businesses, making its brewing operation a more attractive target and implying it was prepared to do a deal at the right price.