just On Call - SABMiller douses analyst scepticism on Foster's Group
- Analysts sceptical about strategy
- SABMiller CEO says Foster's buy will add to profits
- Acquisition is "not a volume play", says Mackay
SABMiller CEO defends Foster's Group approach amid analyst scepticism
Foster's said today (21 June) that it has rejected a cash bid from SABMiller valuing it at AUD11.2bn (US$11.8bn) including around AUD1.8bn of debt. It said that the offer "significantly undervalues the company", which is Australia's largest brewer via its Carlton & United Breweries business.
However, while Foster's is demanding more money, SABMiller's CEO, Graham Mackay, found himself forced to justify an approach for Foster's at any price when questioned by analysts today.
"Is there nothing obvious that commentators might have forgotten?" asked one analyst on the conference call, as he and colleagues sought to understand SABMiller's strategic thinking.
SABMiller said that, under its current offer, Foster's Group would add to global profits from the first year of acquisition. "This transaction is more about profits growth than volume growth," said Mackay. "Particularly over the first few years, we think it's an attractive proposition [when] viewed as such."
The current offer values Foster's at 12.5 times EBITDA, which is what many analysts consider to be the going rate for acquisitions in the brewing sector.
The bid, at AUD4.9 per share in cash, represents a 14.5% premium on Foster's closing price on 2 June. But, last week, JP Morgan analyst Matthew Webb said that SABMiller "could just about get the numbers to add up by paying a small premium...10% above Foster's share price".
Australia's beer market has struggled for momentum in the last year. Foster's' CUB business, although still accounting for one in two beers sold in the country, has been leaking market share for around five years.
Profitability, however, is pretty strong. "On the positive side, Foster's has a 38% EBIT margin, which puts it in the premier league of global brewing," said analyst group Sanford Bernstein in a recent note.
Mackay declined to enter into specifics on today's call, but he said that SABMiller sees potential for synergies in Australia. "Foster's is highly profitable and cash generative," he said, but added: "The company has been underperforming and continues to do so. We believe this provides opportunities for us to apply our operational and commercial capabilities to enhance performance."
One complication to an SABMiller-Foster's marriage is that the Peroni Nastro Azzurro brewer already operates a beer joint-venture in Australia with Coca-Cola Amatil. However, SABMiller said that plans are in place for it to acquire this venture outright, for around AUD305m, should it succeed in agreeing a deal with Foster's.
Mackay said that SABMiller would need regulatory approval to acquire Coca-Cola Amatil's 50% stake in Pacific Beverages, but he said that "we do not anticiapte difficulties in that regard".
It is unclear what the next steps will be. Foster's is seeking a better offer, but analysts do not believe that SABMiller could go much higher and still make a deal work at the bottom line. At the same time, news of SABMiller's approach could flush out interest from any other parties, with Grupo Modelo believed to have been working on a bid in the last few weeks.
Foster's' share price leapt by 13% on the Australian Stock Exchange today, to AUD5.14, which means it has already surpassed SABMiller's offer price. SABMiller's share price, meanwhile, was down 3% in morning trading on the London Stock Exchange.
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