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No worries for Foster’s but SAB may find this beer buy hard to swallow

SABMiller’s ultimately successful bid for Australia’s Foster’s may leave buyer with a hangover

At face value, it’s a triumph for SABMiller. Foster’s chief executive, John Pollaers, who had previously grumbled about an attempt at “a slow seduction”, has cuddled up in no time at all by agreeing takeover terms. What a charmer SAB boss Graham Mackay must be. Or perhaps he’s just paying top whack. The latter seems more likely.

There is a serious risk that SAB is plunging into the Australian beer market at the wrong time at the wrong price. It is true that an agreed offer at A.10 a share, or A.9bn, appears a modest uplift on the opening hostile shot at A.90. But Foster’s investors will also get A{content}.30 a share via a special dividend before completion, so the “real” takeover price is A.40 a share, or 10% higher than the first pitch. No worries, says SAB: Foster’s cash position is better than assumed at the outset; and the Australian government is chipping in by confirming some more tax losses.

Well, OK, but even with these advantages the numbers don’t suggest a bargain. SAB thinks its earnings per share will rise in year one, but that is mostly the effect of funding the deal with debt. Economic returns – in other words, returns above SAB’s cost of capital – are due to be achieved only by 2016.

A lot can happen in that time. For a start, the Australian economy, having been lifted high by two commodity booms in a decade, could soon suffer a serious bump; even the perennial optimists at the mining group Rio Tinto are sounding a note of caution about the current state of demand for industrial commodities.

Then there’s the uncertainty surrounding SAB’s ability to achieve its planned cost savings and improvements. Foster’s already has splendid operating margins of 38% and, even in a duopoly like the Australian beer market, one has to wonder how high they can be forced without accelerating the locals’ shift towards wine.

It didn’t help that Mackay provided only a sketchy account of how SAB can perform wonders that Foster’s couldn’t. SAB’s sheer size will yield some buying benefits, but beer is a local market everywhere. Until Mackay produces firmer details, it’s Foster’s shareholders who should crack open a can of VB. © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds