Was a Fosters Group buyout inevitable?

Was a Foster's Group buyout inevitable?

Last week, we bade farewell to Foster's Group as SABMiller closed its acquisition of the Australian brewer. Although the beer sector's thirst for consolidation has been relentless, Foster's also contributed strongly to its own downfall. Here, just-drinks identifies five key factors that led to the brewer's sale to SABMiller.

  1. In April 2006, Scottish & Newcastle (S&N) acquired the rights to Foster's lager in Europe, including Russia, for GBP309m (US539m). S&N's then CEO, Tony Froggatt, professed to be "delighted" that the company had gained full control over a "core" brand in "key markets". 

    Only four months later, Foster's quit brewing in Asia after selling its assets in Vietnam and India to Asia Pacific Breweries and SABMiller respectively. At the time, Foster's said that it had struggled to "generate adequate value" from its namesake brand overseas. These admissions of defeat in foreign markets saw Foster's retreat to its rump beer business Australia, effectively giving up on its ambitions to join the global brewing elite, thus making it more susceptible to a takeover by a global player at a future date.

  2. Alongside the overseas asset sales, Foster's had been gobbling up wine assets. Some analysts warned in 2005 that Foster's had paid a high price - more than US$3bn - to buy the Southcorp wine business, and they questioned whether the deal would be in the best interests of shareholders. 

    Two main problems quickly emerged: While the fortunes of Australian wine began to sour due to overproduction at home and stronger competition abroad, the group appeared to find it difficult to integrate its beer and wine operations successfully.

    Over the short and medium term, wine proved something of a poison pill that warded off potential beer suitors. Longer-term, however, the failure of Foster's' wine adventure ultimately crippled the enlarged company and led to the demerger of its beer and wine arms earlier this year. From the demerger in May, and even for a year before it, analysts were salivating at the idea of Foster's beer business coming up for grabs.    

  3. At the shareholder vote on SABMiller's proposed acquisition of Foster's last week, the Australian brewer's chairman, David Crawford, was quoted as blaming the group's loss of independence on currency. In so far as the performance of Foster's' wine business is concerned, the appreciation of the Australian dollar against GBP and US dollar currencies certainly played a major role in eroding profits. For the fiscal year to the end of June 2010, higher exchange rate assumptions played a major role in forcing Foster's to record a AUD1.27bn impairment charge on the value of its wine assets. The AUD currency has been at parity with the USD for much of 2011, having appreciated by 30% in five years.
  4. Did Southcorp and the subsequent wine restructuring programme distract Foster's management from the group's Australian beer business? It's possible. Whatever the reason, Foster's' beer arm, Carlton & United Breweries (CUB), has been leaking volume share in the Australian beer market. In May 2010, CUB's beer market share dipped below 50% for the first time, down from 55% in 2005, according to Nielsen figures.

    Much of this decline has been attributable to falling sales of the brewer's flagship Victoria Bitter, first brewed in Australia in 1854. In early 2009, CUB's marketing director, Paul Donaldson, told just-drinks that the group had seen a "systematic shift" towards consumption of lighter beer styles in Australia. Since late 2009, when Kirin Holdings acquired full control of the market number two, Lion Nathan, Foster's has also faced a wealthier opponent on its home territory.

    Inevitably, the loss of market share led to doubts about management strategy. After agreeing to buy Foster's, SABMiller's CEO, Graham Mackay, said that there had been "considerable churn in the [Foster's] management and, with it, a lack of focus by generations of management which preceded the current one". Weakened confidence in Foster's management arguably provided fertile ground for predators.

  5. A takeover would clearly not have been possible without interest from suitors. Consolidation in global brewing has proved relentless this century, as witnessed by InBev's record-breaking US$52bn takeover of Anheuser-Busch in late-2008. For all that, though, Foster's is the deal that almost didn't happen, with some of SABMiller's own shareholders expressing unease at the deal. Other potential suitors, such as Grupo Modelo, Asahi Group and Molson Coors, faded into the shadows, while the remaining multinationals are more interested in either cutting debt or developing operations in emerging markets.

    Australia is one of the most profitable beer markets in the world, but it is no emerging market. Consumption has been in broad decline there since the 1970s. In the end, SABMiller had to claw away at Foster's' price expectations to get a deal that would deliver a decent return on investment. It received considerable help from a crisis of confidence on stock markets worldwide.

    However, that an Australia-focused, standalone Foster's beer unit would be acquired always had a sense of the inevitable. Opportunities to acquire publicly-listed brewers are dwindling and Foster's represented a rare chance to gain scale in a cash-rich beer market.