In the Spotlight - SABMiller to Create Lean, Mean Foster's Group Cash Machine?

Three months of turning the screw on Foster's Group's management has paid off for SABMiller; at least, that's if you agree with the acquisition in the first place. Here, just-drinks takes a look at the early market reaction.

Foster's management sought to save some face yesterday by emphasising to shareholders that they will get AUD5.5325 (US$5.5469) per share "in-hand" from the SABMiller deal. SABMiller, meanwhile, said that it will only actually pay out AUD5.1 per Foster's share, with a further 4.4325 to be paid out by Foster's itself prior to closing the deal.

SABMiller appears to have done a sound job of flooring Foster's price expectations. Some luck from the timing of stock market uncertainty, as well as a lack of rival bidders, also helped out. Foster's shares soared by 7.6% to AUD5.26 today (22 September), but had been languishing at or below the AUD4.9 mark for a few weeks.

That said, there are still rumblings that the Peroni Nastro Azzurro brewer has paid too much for a one-market brewer that has struggled to adapt to consumer tastes. Sanford Bernstein analyst Trevor Stirling told just-drinks yesterday that the deal looks pricey given that SABMiller has paid a higher relative price for Foster's than InBev did for Anheuser-Busch. SABMiller's share price has fallen slightly faster than the FTSE100 since the deal was announced.

In a note to clients today, Stirling said: "SAB will have to deliver almost the same level of margin expansion that InBev delivered at old A-B (13%pts from 2008 to 2010), but to a much smaller scaled business, which is already running at much higher margins." He added: "This would also mean that Foster's operating margins will end up higher than AmBev's current beer margin in Brazil, in a market structure that is much less favourable."

There will a lot of focus on SABMiller's mathematics skills over the next few months. Dana Cimilluca wrote in the Wall Street Journal: "For SABMiller, the rationale for the deal appears to be mainly about running Foster's better and more efficiently by folding it into the global juggernaut." 

SABMiller CEO Graham Mackay was keen to emphasise the opportunities to analysts yesterday: He said that there has been "considerable churn in the management and, with it, a lack of focus by generations of management which preceded the current one". Naturally, there are already concerns among trade unions about job cuts, as SABMiller strives to get an acceptable return on investment. 

"We estimate that AUD200m or AUD210m (about 8%) of annual operating costs can be cut from Foster's already profitable business," said analysts at Morningstar. Bernstein's Stirling, however, thinks SABMiller may have to reach annual cost savings of US$350m, assuming annual average net sales growth at Foster's of 5.5%. 

Morningstar analysts were, on the whole, more upbeat on the deal, which will see Foster's represent around 10% of SABMiller's profits. They highlighted international opportunities for the Foster's brand: "The Foster's brand still has the potential to expand geographically, and we anticipate that SABMiller will reinvest Foster's strong cash flows to further build out its emerging-markets business," they said.

This looks to be the gold nugget that SABMiller has spied in the amber nectar. To make the deal work, the brewer needs to slimline Foster's in Australia and make its beer offering more attractive to consumers. This, though, could be a means to an end in itself: perhaps the most attractive thing about Foster's is its potential to generate extra cash for the SABMiller business globally.