Will SABMiller move for Fosters?

Will SABMiller move for Foster's?

Will SABMiller finally break cover and go for a big acquisition or should we look to Asia to provide a suitor for Foster's beer business? Here, just-drinks takes a look at the names in the hat.

Hardly has the dust settled on news that Foster's will demerge its wine and beer arms and analysts are frothing at the mouth over potential bids for the group's beer arm, Carlton & United Breweries (CUB).

Consensus has it that Foster's' soberingly tough wine business has acted as a form of poison pill, warding off bids for the more attractive CUB business. Removing that barrier could kick-start a proverbial bun fight between the multinational brewers.

Australia's beer market has largely side-stepped the recession that has engulfed many developed markets over the last two years. CUB is also a high margin business capable of generating strong profits.

That said, Foster's Group's share of the Australian beer market slipped below 50% for the first time during the first quarter of 2010, according to recent Neilsen figures. The business has work to do to engage with a new generation of drinkers thirsting for lighter styles of beer.

If CUB were to sell at the same multiple as Lion Nathan did last year - around 12.5 times forecast earnings - then the business could fetch up to AUD13bn (US$10.7bn). It might even fetch more, because there was no bidding war for Lion Nathan.

Merrill Lynch analyst David Errington said yesterday that SABMiller is top of his list to acquire an independent CUB. The Peroni Nastro Azzurro brewer has naturally declined to comment, but sources familiar with the group have indicated to just-drinks in the past that CUB is a business that it would be interested in.

SABMiller already operates a brewing venture with Coca-Cola Amatil (CCA) in Australia, plus it has the rights to the Foster's lager brand in the US and India. The CCA venture has built a new brewery, named Bluetongue Brewery, in New South Wales, which is a rare step for SABMiller in developed markets. Once it has turned soil, the brewer will generally not be satisfied unless it has number one spot in the market.

However, SABMiller was also top of many experts' lists to buy Mexico's FEMSA, right up until Heineken announced that it had already sealed the deal. As with FEMSA, it is not clear that CUB is a 'must-have' rather than a 'nice-to-have' for SABMiller and the brewer might be unwilling to break its strict fiscal rules should a bidding war for CUB raise the price tag.

In addition, SABMiller likes to build businesses from the ground up and may rather build its own portfolio in Australia.

Molson Coors has already declared its interest in CUB and has built up a 5% stake in Foster's Group. Some analysts believe that Molson Coors could be priced out of the bidding, but it could go in with a partner, as it has with SABMiller in the US.

Strong interest in CUB is likely to come from the Japanese brewers, which have all outlined medium and long-term plans to use foreign beer sales to reduce their reliance on the stagnant domestic beer market. Kirin Holdings bought CUB rival Lion Nathan last year, so Asahi, Suntory and, possibly, Sapporo may seek to follow suit.

Asahi and Suntory have already bought into Australian soft drinks by acquiring Schweppes and Frucor respectively in the past 18 months. Asahi, meanwhile, has a 20% stake in China's Tsingtao, which is also openly seeking opportunities outside of China.

Heineken, which owns the rights to Foster's in the UK, has previously been touted as a bidder. However, that was before the brewer swallowed FEMSA, which in itself was seen as a stretch for Heineken, coming so soon after its part-takeover of Scottish & Newcastle. Latin America and debt reduction are likely to take up most of Heineken's time over the next two years.

There is an outside chance that Diageo would look at CUB. Like SABMiller, its name is often touted because it has the financial means and the global reach. Diageo is keen to sell more beer in Asia and CUB might meet its 'Total Beverage Alcohol' strategy, but the group appears more interested in spirits acquisitions and may not have the appetite to lumber itself with CUB's portfolio.   

Of course, the final yet significant point is that Foster's does not plan to demerge its beer and wine businesses until the first half of calendar 2011, at the earliest. There is plenty of ground to be covered before, then.