City unsurprised by Foster's board approval for new SABMiller offer

The announcement this morning of SABMiller's offer of A$5.10 per share follows the Foster's boards previous dismissal of a $4.90 per share hostile offer that UK-based SABMiller had pledged to take directly to Foster's shareholders.

But Foster's' directors have now unanimously recommended that shareholders vote in favour of the offer, and will themselves vote in favour in the absence of a higher-valued competing offer and subject to an independent confirmation that SABMiller's bid is in the best interests of shareholders.

SABMiller said the Foster's acquisition was consistent with its strategic priorities, namely to provide SABMiller with "exposure to Australia's strong economic growth prospects, a leading position in the stable and profitable beer industry and the opportunity to apply SABMiller's capabilities and scale to improve Foster's' financial and operating performance". ​

Martial rhetoric vanishes​

Martial rhetoric of recent weeks saw SABMiller complain that there was "no willingness to engage"​ from the standpoint of Foster's board in mid-August, while the latter said at the time that SABMiller's A$4.90 per share bid significantly undervalued the company.

SAB Miller also complained to the Australian Takeovers Panel early this month, alleging that Foster's had published "misleading and deceptive information"​ in relation to forward-looking statements in its full-year accounts.

But signalling a step change in rhetoric between the two companies, SABMiller chief executive, Graham Mackay, said this morning: "We are pleased that we have reached agreement on a recommended transaction to be put to Foster's shareholders.​

"Foster's will become an important part of our business, and through the application of our commercial capabilities and global scale, we expect to build on the initiatives that Foster's management has put in place, further enhancing Foster's performance and creating value for our shareholders."​

Investec analyst Martin Deboo told BeverageDaily.com that the improved bid came as no surprise: "We knew that SAB were obliged to table a firm offer at some point this month, so there was no surprise that an offer eventually came." ​

He added: "As to Foster's board reaction, the company's share price was voting for the value of the company being somewhere around SAB's original offer. The view was that it wouldn't take too much more for it to bring them on side." ​

Deboo said the new offer was "towards the upper end but within the range of analyst consensus"​, while SAB had been unusually diligent in justifying its offer price, "commendably so in technical terms"​.

"On our estimates that amounts to a x6 EBITDA (Earnings before Interest, Tax, Depreciation and Amortisation) exit multiple for Foster's. That's about the average of 15 big brewing deals worldwide within the last decade or so that we've looked at,"​ said Deboo.​

"And crucially it's about half a turn less than what [Japanese drinks firm]​ Kirin paid for [Australian brewer]​ Lion Nathan [in 2009].​" ​

Compelling deal?​

Asked if the deal was a compelling one for SABMiller, given stagnant Australian beer sales, Deboo said: "Compelling puts it a little bit strongly than I would, but it's a decent deal. Our view of Foster's from the start - recall the general marget negativity - was that it always looked a decent deal. ​

"We weren't dogmatic about always wanting to see SAB always developing and emerging markets. Foster's is a big deal in money terms, but it's really a big bolt-on for SAB. It's about 10 per cent of group sales and it doesn't dilute their developing in emerging markets proposition very much. ​

"Given that we think Foster's was an undermanaged business with development potential, we like it. The qualifier is that after SAB's shares troughed on announcement of the deal, they have performed quite strongly since, so expectations are now higher."​

Foster's will now propose a 'scheme of arrangement' to shareholders specifying the ordinary conduct of Foster's business from signing to completion and merger and implementation planning.

This document also specifies that, under certain conditions, Foster's will pay SABMiller a break fee of around A$99m or €74.2m (around 1 per cent of the new offer's equity value), "including if a higher-valued competing transaction is announced and completed within 12 months".​

Both companies expect that the scheme document will be posted to Foster's shareholders in approximately six weeks time, with SABMiller hoping to complete the acquisition before the end of this year if the scheme is approved at relevant meetings.

SAB Miller has reached a separate agreement with Coca-Cola Amatil to acquire its share of the Pacific Beverages joint venture, should SABMiller succeed in acquiring a controlling interest in Foster's.