SABMiller could snub Fosters

SABMiller could snub Foster's

SABMiller is by no means certain to gun for Foster's beer business in Australia, as underlined by the opening of its Bluetongue brewery in the country this week.

The opening of the US$105m facility, after 18 months under construction, is doubtless a statement of intent from Pacific Beverages, the joint venture between SABMiller and Coca-Cola Amatil in Australia.

The group said it is seeking to grow its self-attributed 10% volume share of the country's premium beer market.

Against this backdrop, those who view the demerger of Foster's wine and beer businesses as one long coronation ceremony for SABMiller on Australia's beer market should think again.

"We are certain that SABMiller has looked closely at buying Foster's in the past, and will no doubt re-examine a potential deal in the light of last week's news, [but] we see limited upside for SABMiller," said Sanford C Bernstein analyst Trevor Stirling in a note earlier this month.

"Although Foster's is the largest player in the domestic duopoly, it has been slowly but steadily losing share for over ten years, with the winners being imported premium brands and local craft beers."

Pacific Beverages, then, only has around a 1% share of Australia's overall beer market, but it is operating in the right segment.

As we have argued previously on just-drinks, SABMiller may not want to lumber itself with a Foster's business that has steadily lost volume market share in the last five years. Foster's remains number one, with around a 50% market share, with Kirin-controlled Lion Nathan in second place on around 40%.

The Bluetongue brewery, coupled with comments from Pacific Beverages this week, indicates that SABMiller and Coca-Cola Amatil may prefer organic growth, via a fleet-footed presence in Australia's premium beer market - which would be similar to SABMiller's strategy in the UK, another mature beer market.

The new head of Coca-Cola Amatil's alcoholic beverages division was quoted recently as saying the company had "no interest" in Foster's.

Meanwhile, Ari Mervis, SABMiller's Asia MD, said of Bluetongue this week: "This impressive facility is the first to be built by our joint venture in Australia." The implication is that more building work could be in the pipeline and it must be said that SABMiller's strategy in new markets, with the exception of the US, tends to focus on building from the ground up rather than parachuting onto the market's summit.

There is no doubt that SABMiller has the funds to go for Foster's, while the brewer already holds the licence for Foster's lager in India. The Foster's Carlton & United Breweries business in Australia also has strong margins. Bernstein ranked it recently as the eigth most profitable beer company in the world, while it is only the 25th largest beer producer.

But, growth prospects in a mature market look slim and SABMiller's relatively healthy balance sheet is no strategic reason for a deal. Let us remember that SABMiller was most analysts' favourite to acquire FEMSA Cerveza in Mexico until Heineken swooped in and bagged the deal.

Sources close to SABMiller indicated to just-drinks at the time that FEMSA was a nice-to-have rather than a need-to-have. In the end, SABMiller was unwilling to break strict financial discipline for Mexico's number two brewer.

Analyst consenus is that Foster's could fetch around 12 times forecast earnings, which would mean a price of more than US$10bn. FEMSA sold at 11.4 times forecast earnings, which begs the question as to whether SABMiller would stay the distance.

just-drinks leans towards the conclusion of Bernstein's Stirling: "Net-net, if another brewer is willing to pay a 12x multiple for Foster's beer business, we think it very unlikely that SABMiller will get dragged into a bidding war." 

The unknown quantity remains the prospect of a joint bid with another player. Molson Coors, for example, has built up a 5% stake in Foster's and has publicly declared its interest in the group's beer business.

A carve-up, then, between Molson Coors and SABMiller, who already work together in the US, is a possibility.