Foster’s gets full measure from SABMiller

September 21, 2011

By Quentin Webb
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Like two quarrelsome drunks who are suddenly best of friends, SABMiller and Foster’s Group have quickly patched things up after earlier hostilities. Foster’s has done well to secure a sweetened $10-billion-plus offer from its London-listed rival, with markets queasy and no rival bidders in sight. The deal is hardly cheap. But the sums just about work for SAB, and Foster’s was one of the few easily buyable brewers of size out there.

The all-cash deal is worth A$5.10 for each share in the Australian target, but this will come after Foster’s makes a special A$0.30 cash return already flagged by the group. Shareholders will also receive a previously announced full-year dividend, which SAB had previously said would be lopped off any offer.

The terms imply an enterprise value of about A$11.9 billion at completion, based on SAB’s forecast of A$1.4 billion for Foster’s net debt by end-December. For its part, SAB claims the implied EV is in fact A$400 million lower, after effectively haircutting net debt for the estimated value of some inherited tax losses.

Foster’s EBITDA in the 12 months ending June 2012 is likely to hit A$911.5 million, on Starmine estimates. On that basis, the deal values Foster’s at a little over 13 times forward EBITDA. That’s a full multiple, ahead of the 12.5 times Kirin paid for Aussie rival Lion Nathan. SAB says it could take five years for the deal to cover Foster’s 8.7 percent weighted averaged cost of capital. That would normally push investors’ patience. But SAB is a master in carving out lucrative niches for different beer brands, and shareholders can reasonably expect the deal to create value sooner — especially if, as some believe, Foster’s has plenty of cost-cutting potential too.

For Foster’s, the outcome is an immediate vindication of the spinoff of its wine unit, which had clearly deterred those hankering after the beer business. Chief Executive John Pollaers has squeeezed out a fully priced bid, despite equity market volatility and failing to get an auction going. As for Graham Mackay, SAB’s long-serving chief executive, he may well end up handing over the reins before it’s clear the deal is a success.

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