Mark Kelly, Special Situations Sector Strategist at Olivetree Securities on SABMiller’s agreement to buy Australian beer group Foster’s for AUD6.53bn…
The conclusion of this negotiation has come a lot quicker than most were expecting. Up until now there was a real standoff between the two companies. SAB had previously offered AUD4.90bn, so the new offer is a 10% premium to the original approach. It has been relatively clear over the last few months that Fosters’ defence team had been (unsuccessfully) looking for white knights with Modelo the strongest possibility. A recommendation of this new SAB offer at a modest premium to the old price shows what we realistically already knew – that counterbids to this offer are unlikely.
Despite accusations of top-line-growth dilution thanks to this deal, we think SAB have done a good job of persuading its own shareholders as to the merits of the acquisition. Fosters brings SAB a large chunk of 100% owned cash flow while the nature of SAB’s existing businesses means that the vast majority of its EBITDA is owned via JV’s, an inefficient way to run a company this size.
SAB will be expecting to materially better the efficiencies and market structure of Fosters’ business, thus we would expect SAB institutional shareholders to take this well. The transaction is, thanks to the cash nature, EPS accretive to SAB in year one.
Having said that, the AUD5.40bn price is at the top end of what we learned was the multiple range acceptable to SAB shareholders; most told us over the course of this deal that they would struggle with anything over 13.5x prospective EV/EBTIDA.
We think most Foster’s shareholders will be delighted with this outcome: a broad survey we ran a few weeks back suggested an appropriate price of AUD5.20bn – AUD5.30bn. That the price implies a multiple at the top end of the acceptable range to SAB shareholders suggests all parties should be supportive of the deal.
SAB will not need its own shareholder vote for this deal as it is smaller than the 25% limit required under UK laws. We would not expect to see any complications to this deal proceeding as planned now, and we would expect SAB shares to perform reasonably well from here. Foster’s will trade tightly to the implied price. We perceive the risks to this transaction as slim.”
