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Sniffing defence

23 August 2011 By John Foley

Foster’s has offered up an aperitif in its defence against hostile suitor SABMiller. That is all it needs to do at this stage. With SAB yet to make a formal bid, the Australian brewer has left itself plenty of room for something stronger later.

After Foster’s first earnings release since it cast off its wine business in May, it is clear that if SAB wants a recommendation, it must pay more. A promise by Foster’s to return capital to shareholders was sufficient to nudge the shares past SAB’s offer price of A$4.90. But a stock buyback or special dividend of “at least” A$500 million is little more than a teaser. Foster’s can afford much more. Say it tapped its A$1.1 billion of undrawn credit lines and returned the proceeds to shareholders, it would still have a conservative net debt of just 2.8 times 2012’s forecast EBITDA.

Breakingviews calculator: What returns can SABMiller make on Foster’s?

Meanwhile the numbers showed business wasn’t great, but equally was no worse than expected. Revenues fell 5 percent as Australians drank less, but Foster’s stopped losing market share. Margins of 38 percent picked up from the 37 percent reported in the first half. That’s hardly a reversal of fortunes, but should buy Foster’s unproven chief executive John Pollaers some credibility.

Foster’s has no reason to pull the stops out for now. SAB still has two months to make a formal offer and since a key driver of Foster’s value is Australia’s economic outlook, timing is important. The gyrations of the Australian dollar and its exposure to commodities means that investors’ view can change rapidly.

In the meantime the earnings fortify the defence, not least because they show how little capital spending Foster’s has received in the past. Depreciation, a sign of past investment, was a mere 2.3 percent of revenues. SAB, by contrast, spends 6 percent. Rival Lion Nathan, perhaps Foster’s closest comparator, spent 4.4 percent before it was bought by Japan’s Kirin in 2009.

That suggests using EBITDA metrics, while popular with analysts, might be selling Foster’s short. Use a multiple of operating profit instead, and the 15.5 times Lion Nathan commanded suggests a value for Foster’s of A$5.75 a share. If SAB wants a board recommendation, it may need to at least split the difference – with an offer of say A$5.30 – to get a hearing.


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