News is out that Fosters Group (FGL) just knocked back a buy-out bid by SABMiller worth $9.5billion, claiming it significantly undervalues the company. That’s a big call by the beer barons; the bid represented a per-share value of $4.90 and Fosters is trading around $4.50. Let’s see if it stacks up based on the fundamentals.
Fosters announced a demerger of its Treasury Wine Estates in February 2011. This demerger, whilst getting rid of a troubled arm, also lowered the equity per share value of Fosters significantly. In fact, the demerger booklet has Fosters net assets at negative $200million after the merger, although this should become positive after the reinvestment of some of FY11s profits. Analyst’s reports I have read give current equity per share at only $0.04. Such a low number also makes forecasting next year’s return on equity (ROE) difficult, but the same report gave a forecast of 70%. A high number, but don’t forget the equity per share divider is very, very low.
For the sake of a quick valuation, let’s assume current equity per share is $0.10, normalised ROE (i.e. including franking credits) is 70% for FY12 and declines to 60% over 5 years. Assuming one third of profits will be reinvested and our required return is 15%, I calculate a value for the demerged Fosters of about $1.30.
That is way, way below the current share price of $4.53 and even further below SABMiller’s bid of $4.90 per share. So in my humble opinion, Fosters is mad for knocking back the offer. On the flip side, I think SABMiller is overvaluing Fosters by a country mile – and that is just based on the numbers. When you consider Fosters dominant market position (about 50% of the Australian beer market), 4 years of lacklustre ROE and the recent demerger indicate management is not performing well.
While not discouting the possibilty that SABMiller will go higher, they may have just dodged a very expensive bullet.
If I was a poor value investor that owned shares in Fosters, I’d need a stiff drink to calm the nerves.
Update: Maybe not so bad
The MSM is all over the Fosters-SABMiller deal this morning. Most talk about the past demerger from treasury wines, and how this has opened Fosters up to a bid from a bigger player. Gottis piece in Business Spectator is the best because he actually uses numbers – those things oft-neglected in the MSM – to take a shot at valuing Foster.
He comes up with about 33 cents per share in dividends over the next few years, boosted in part by a recent favourable tax ruling. Which means the figures I borrowed for ROE yesterday would be way too low.
If we ditch the ROE analysis (due to the trouble in determining the equity base post-merger, as highlighted by Mining Man) and look at earnings multiples, we get about $650m in estimated NPAT for FY11 vs the $9.5b bid. That’s an earnings multiple of just under 15.
Too high? I still think so, but I could very well be wrong if SABMiller turns Fosters into the cash cow it should be with its current Australian market position.
Things will be a lot more clearer come the next earnings report.
Disclosure: The author is a Director of a private investment company (Empire Investing Pty Ltd), which has no interest in the businesses mentioned in this article. The article is not to be taken as investment advice and the views expressed are opinions only. Readers should seek advice from someone who claims to be qualified before considering allocating capital in any investment.