Fosters Group running out of  breathing space?

Foster's Group running out of breathing space?

Foster's Group has erected its takeover defences, but SABMiller still doesn't have to stretch too far to breach the walls.

The actual full-year performance figures provided something of backdrop for Foster's Group today (23 August), as the Australian brewer set out its stall for either remaining independent or forcing SABMiller to pay a lot more for the group's head on a spike.

Foster's' methods are straightforward enough. It will bung a load of cash back to its own shareholders - at least AUD500m in the next year - and it has outlined a comprehensive review of supply operations in Australia; the subtext being that the Foster's board is capable of both further improving profit margins and delivering value upfront to investors.

Perhaps the market was ready for it, or perhaps it is still computing the consequences? In any case, Foster's, for all its bluster, found itself unable to lift its share price above the AUD5 mark in today's trading on the Australian Stock Exchange. 

On this evidence, SABMiller might be able to get Foster's by paying only a slight premium on its current AUD4.9 per share cash offer. The Peroni brewer has been trying to set up this kind of situation all along. SABMiller knows as well as anyone how tight the margin for error is on the bid price: pay too much and it will struggle to make the numbers work. 

Last week, Citigroup suggested that SABMiller could get a reasonable return on investment at up to AUD5.2 per share. At the end of June, following SABMiller's initial bid, Investec Securities estimated that SAB would have to generate synergies of US$230m by the sixth year following an acquisition to reach a 9% return on capital. An offer price of AUD5.38 per share would require annual synergies of US$350m for the same return.

There are reports that Foster's remains a hard deal for SABMiller's own shareholders to swallow. MF Global analysts said last week, following SABMiller's decision to go hostile: "We do not believe this is a deal investors want SAB to complete." They added: "The acquisition of Foster’s would dilute SAB’s emerging market exposure from the current 82% of EBIT to around 72%."

Today's figures from Foster's are hardly inspiring and will only emphasise that Australia is a dead-end in brewing. Foster's already has some of the highest margins in global brewing and, in terms of sales, it is king of a sinking sandcastle.

The firm has stemmed market share loss, but its Australian beer volumes still dropped by 5% for the 12 months to the end of June. Net sales at the Carlton United Brewers arm fell by 4.6%, while Foster's Group profits from recurring operations dropped by almost 9%, to AUD495m.

SABMiller can't afford to pay much more than its current offer price for this kind of business. Yet, on balance, today's announcement supports SAB's position. Slowly yet unmistakably, Foster's does look to be running out of wiggle-room.