June 2, 2010 / 4:37 AM / 7 years ago

DEALTALK-Foster's beer could pull bids of $10 bln

6 Min Read

(For more Reuters Dealtalk stories, click on [DEALTALK/])

* Foster's beer operations seen valued at up to A$12 bln

* High margins and a duopoly market make for lucrative prize

* Global brewers and Coca-Cola Amatil possible suitors

By Victoria Thieberger

MELBOURNE, June 2 (Reuters) - Foster's Group Ltd FGL.AX, Australia's largest brewer, could attract takeover bids of up to $10 billion from suitors including SABMiller and Asahi, after a long-awaited decision to split off its struggling wine business.

Analysts and fund managers say potential predators have been reluctant to move on Foster's, despite one of the highest-margin brewing operations in the world, because of the work needed to turn around the wine operations amid a global glut.

Foster's conceded last week that its decade-old strategy to mix beer and wine had fizzled, after total writedowns for wine that analysts estimate at up to A$3 billion, but said it will not formally split off wine until 2011. [ID:nLDE64P0BG]

"At least this clears the way for potential bidders to look at the company," said Brian Han, portfolio manager at Constellation Capital Management, which owns Foster's shares.

The Carlton & United Breweries beer unit, run by former navy weapons' engineer John Pollaers, generates 85 percent of Foster's group earnings, and has a profit margin of 38.5 percent.

"There is talk about loss of market share (in beer) but they still have a very strong position in a duopoly market and it throws off a ton of cash, so it would be an attractive prize to a lot of buyers," Han said.

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For StarMine comparative data on potential suitors, click on:

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For a Graphic on Australia's beer and wine market:

here

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Plenty of Interest

Foster's declined to comment about potential suitors. When it announced the beer and wine split last week, the company said it had received no approaches.

A deal is expected to be worth around A$12 billion for the beer assets alone, with brands including Foster's Lager, Victoria Bitter and Pure Blonde. Foster's has about 50 percent of the Australian beer market, ahead of rival Lion Nathan (2502.T).

And there appears to be plenty of interest in the brewer.

Analysts say Japan's Asahi Breweries (2502.T), with a war chest for acquisitions of up to $4.6 billion, would be keen.

SABMiller SAB.L, which owns the brewing rights to Foster's in the United States, has declined to comment on a Daily Telegraph report last week that it has held early stage talks with advisers about making a bid.

Molson Coors (TAP.N) Chairman Peter Coors said he would be interested in Fosters, according to press reports last week.

Still, Molson Coors, which owns a 5 percent stake in Foster's, would need to team up with a beer giant such as Carlsberg (CARLb.CO) for financial firepower, analysts say.

Local rival Coca-Cola Amatil (CCL.AX), which has an Australian joint venture with SABMiller, is also considered a likely predator. Coca-Cola Amatil would not comment for this article.

"Amatil would definitely be interested and the logic of putting together a beer and soft drinks company is inescapable because they are very similar products. It makes a lot more sense than putting together a wine and beer company," said Tom Elliott, managing director of hedge fund MM&E Capital that takes stakes in merger situations.

"But all the big global (beer) players will have a look at it," added Elliott, whose fund owns Foster's shares.

Lion Nathan dropped a planned $4.9 billion takeover of Amatil early last year.

Japan's Kirin Holdings (2502.T) bought the 54 percent of Lion Nathan it didn't already own last year for $2.5 billion, equivalent to 12.5 times forecast earnings.

Applying a similar multiple to Foster's would value it at above A$12 billion, based on the company's forecast of earnings before interest and tax of A$1.08 billion.

"This is the last strategic asset you have got in the western world where you've got EBIT margins in the high 30s, you've got 50 percent market share of a mature market, you've got strong cashflow and decent assets," said one fund manager and shareholder, who spoke on condition of anonymity as he was not authorised to speak to the media.

"Global brewers operate on about half those margins. It is going to be coveted by somebody," he said.

SABMiller has a margin of 16.2 percent and Asahi's is 6.0 percent, according to Thomson Reuters data.

Analysts value the wine business between A$1.7 billion and A$3.5 billion, based on a lower multiple of 10 times earnings.

The wine operations have a margin of 10.6 percent. The company spent over A$6 billion building its wine business, the world's second largest, with its acquisitions of California's Beringer Wine Estates in 2000 and Australia's Southcorp in 2006.

Foster's has hired Gresham Advisory Partners to advise on the demerger.

Fund managers were divided over whether a suitor would move before the demerger or wait, with complex debt and structural issues to be resolved.

Foster's shares, even after a 7 percent spike last week, are little changed from the A$5.60 they were trading at before the Southcorp deal, while the broader market is down 12 percent. (editing by Dhara Ranasinghe)

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