SABMiller could make Fosters Group work, says Investec Securities

SABMiller could make Foster's Group work, says Investec Securities

Analysts at Investec Securities have argued that SABMiller's tilt at Foster's Group is more attractive than it first appears.

Many analysts reacted with scepticism to news that SABMiller had launched a AUD9.5bn (US$10bn) bid for Foster's last week, baulking at the prospect of the Peroni brewer diluting its emerging markets portfolio by overpaying to enter Australia's mature beer market.

SABMiller's share price initially sank on the news, but, a week on, it has since recovered much of the lost ground.

"Cheer up is our message," said Investec Securities today (28 June), issuing a buy rating on SAB stock. "We are feeling a bit more upbeat on Foster's than the rest of the market."

It said that the risks to SABMiller from a Foster's buyout are "finite" and that the brewer would only need to score synergies at around the average rate for brewing sector deals in order to see a decent return on investment.

Under its current offer price of AUD4.9 per Foster's share, Investec estimated that SABMiller would have to generate around US$230m of synergies 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 by year six to generate the same level of return.

"Analysed this way, all of our Fosters synergy cases look plausible/achievable on a benchmarked basis, certainly relative to the InBev:Anheuser-Busch synergy targets," said Investec.

"SAB management have proved effective at delivering on cost savings and continue to extract earnings ahead of target with their Business Capability Programme, and through the integration of MillerCoors," it added. 
Following the deal, it added, SABMiller will still reap around 71% of net sales from emerging markets, versus 78% currently.

Earlier today, Merrill Lynch added to a growing sense of optimism by joining Investec in issuing a 'buy' rating on SABMiller stock. SABMiller itself has argued that Foster's strong cash generation makes it attractive, while it believes that there is plenty of scope for improving management practices and tweaking beer prices.

Foster's Group's share price stood at AUD5.17 at the end of today's trading on the Australian Stock Exchange.