The bid by SAB Miller for Foster’s almost certainly won’t go anywhere in its current form. But it is another blow to the non-resources industry base of Australia. What will Australians have to invest in on the ASX when large chunks of our industry base have become the part of someone else’s global food chain? Remember when John Elliott wanted to Fosterise the world? He did at least have some serious global ambitions, as opposed to the unconvincing nibbles in China that Foster’s and Lion Nathan ultimately withdrew from. Now it seems the company couldn’t even manage their part of a domestic duopoly. For some time Foster’s has been losing market share in beer, an unthinkable result. Incompetence rules; the vultures are circling.
The brokers are pretty non-committal. The bid is on 12.5 times enterprise value, which is pretty low for such a mature and sizeable business.
Merrill Lynch is neutral:
SAB has an enviable footprint, being overweight emerging markets and underweight slow-growth Western Europe. This has helped it deliver above- peer volume growth, but high levels of investment and adverse FX have held back EPS. While the long-term growth outlook remains positive for SABMiller, in our view, near-term FX remains volatile and, hence, an unpredictable risk to forecasts, meaning the valuation looks fair.
Credit Suisse is also neutral, but upgraded its price objective to $5.35:
SAB’s motivation for bidding is principally to participate in a high- value beer market that by rights should be growing but is not. SAB Miller believes its marketing capabilities can lift the top line of FGL. With the 25-35 age cohort now growing as a proportion of a growing population base, there is no excuse for brewers not to achieve medium-term volume growth. We believe there will be no competing bids based on our assessment of global brewer balance sheets. For its part, SAB Miller is likely to be disciplined. It is constrained by the reality that FGL operates efficient breweries, the Corona licence may not have value for SAB and SAB must pay CCL.AX at least A$305mn to exit a joint venture.
Yep, Foster’s having failed to globalise, is now part of the food chain.
Deutsche has a hold and a price target of $4.70:
Not a volume play for SABMiller but profitable growth possible. SABMiller conceded that Foster’s would not be a volume play and the growth would be lower than the average of the rest of its portfolio. However, it believed profitable growth was possible and that the deal would meet its investment criteria (earnings accretive and EVA positive in 4-6 years). With this in mind, we don’t think that $4.90 is the group’s best offer but the return profile is unlikely to leave significant room to maneuver. Coca-Cola Amatil looks like it should emerge from this unscathed having negotiated an attractive put option for its share of the Pacific Beverages joint venture.
SAB, in other words, is developing a global portfolio to give ot more strategic options. The very thing that Foster’s should have been doing, but couldn’t. What is interesting is that there is a general feeling that the bid is too low, but brokers are not recommending buying in anticipation of a higher bid. Not exactly a ringing endorsement of Foster’s unimpressive management team. The only buy recommendation out there seems to be for Coca-Cola Amatil, from RBS, which has a target price on the stock of $13.09.
We believe the changes are positive from CCL’s perspective, particularly given the PacBev JV is currently a break even business post commissioning of the Blue Tongue brewery last June.
In the end, the company not only failed to Fosterise the world, it wasn’t even doing a god job of Fosterising Australia. More evidence of the shortcomings of Australian management when the business isn’t a matter of digging holes or engineering financial fiddles.