MELBOURNE Foster's Group FGL.AX on Tuesday rejected a A$9.5 billion ($10.1 billion) cash takeover offer from global giant SABMiller SAB.L as too low, but investors predicted Australia's largest brewer would succumb to a slightly higher offer.
Foster's, one of the last big prizes in a consolidating global beer market, has high margins and a 50 percent market share in Australia, where it brews the Victoria Bitter and Pure Blonde brands.
World brewers, juggling rising raw materials prices and slowing growth in mature markets, are seeking growth elsewhere and a number of smaller brewers are expected to be swallowed up.
News of the bid sent Foster's shares surging 14 percent to A$5.16, a nine-month high and above SABMiller's offer price of A$4.90 per share.
SABMiller, which makes Peroni, Grolsch and Miller Lite, has long been seen as the favorite to take over Foster's, since rivals such as Heineken (HEIN.AS) are struggling with debt piles or lack adequate funding.
"This is probably round one. (SAB) is a big global player and this is a very good margin business versus its peers," said Jason Beddow, chief executive at ARGO Investments, which holds Foster's shares.
Foster's has been the subject of takeover talk since it announced plans last year to spin off its struggling wine operations, which bore nearly A$3 billion in write downs in recent years after a string of poor takeovers.
The approach by SABMiller, which came by letter, according to a source familiar with the situation, was swiftly rejected.
"The board of Foster's believes that the proposal significantly undervalues the company in the context of a change of control and, as such, it does not intend to take any further action in relation to it," the company said in a statement.
The offer was at a slim premium of 8.2 percent to Monday's close.
SABMiller is likely to argue its offer is justified as Foster's already has a takeover premium built into its share price and a rival offer was unlikely to emerge, a source familiar with the deal said.
SABMiller confirmed in a statement on Tuesday that it had made a non-binding, conditional offer, and said it will continue to seek talks with the Foster's board to put an offer to shareholders.
In a video on the firm's web site, SABMiller CEO Graham Mackay said the company could improve the underperforming Foster's business, which operated in a "stable, profitable" market.
"Through the application of our commercial capabilities and best operating practices we believe we can improve Foster's top line growth and enhance its profitability," Mackay said.
SABMiller already owns the Foster's brand in India and the U.S. brewing rights.
Among other potential bidders, Japan's Asahi Breweries (2502.T) has shown interest in the past, according to sources, but said in February it was not planning to buy any part of Foster's. China's Tsingtao Brewery Co (0168.HK) said in May it was not involved in bidding.
Speculation about a joint bid by Grupo Modelo SAB de CV GMODELOC.MX and Molson Coors Brewing Co (TAP.N) earlier this month, meanwhile faded due to complexities in such a deal.
Foster's beer operations and the wine business, Treasury Wine Estates (TWE.AX), were listed separately on the stock exchange just last month.
Investors said the split made the businesses more attractive to potential suitors by separating the struggling wine business, which had been seen as a poison pill.
Foster's Chief Executive John Pollaers, a former navy weapons engineer, has headed the brewing group since April 2010, and was the sixth chief of beer in seven years as the company tried to sell beer alongside wine.
Pollaers, whose last holiday was spent bushwalking with his family in the island state of Tasmania, has said he is confident about the company's growth prospects and was keen to grow market share, which has fallen to around 50 percent.
Foster's is seen as an attractive asset for its high margins and dominant position in Australia, although beer volumes have sagged recently with a poor summer and consumer downturn.
UBS analysts say Foster's margins for beer are about 37 percent, nearly double global peers.
"Obviously SABMiller will not burn all their bullets in the first step. They still have resources to increase the price," said Gregory Lafitte at Louis Capital Markets.
SABMiller said its proposal represented a multiple of 12.5 times 2011 forecast EV/EBITDA and would be attractive to shareholders.
"It's a pretty big multiple," said Craig Young, an analyst at Tyndall Asset management, which has a small shareholding in Foster's.
He said SABMiller can probably afford to pay more than other brewers because it has low gearing and can borrow at very low rates.
"There aren't other obvious buyers waiting in the wings," Young said.
Foster's shares, which have spiked with regularity over the past year each time takeover rumors surfaced, topped the most-actives list in their biggest one-day jump since 1986.
The shares closed up 13.5 percent at A$5.14, while the broader Australian market rose 1.3 percent.
Foster's has forecast that beer volumes will decline between 3 percent and four percent in the current half to June 30, though analysts say the decline could be a bit larger.
Foster's has lagged in the growth of premium beers with its stable of traditional brands. It competes with Kirin-owned (2503.T) Lion Nathan, which has around 40 percent share, with the remainder of the market made up by small craft beers. Kirin paid around 12 times earnings for Lion.
Clearing the way for SABMiller to bid, Australian soft drinks bottler Coca-Cola Amatil (CCL.AX) said earlier it had amended its joint venture terms with SABMiller to enable the brewer to bid for Foster's.
C-C Amatil said the sides amended their Pacific Beverage joint venture, which sells brands including Peroni, Pilsner and Urquell, so that SABMiller would buy out Amatil's share for up to A$380 million.
SABMiller is being advised by JP Morgan (JPM.N), Moelis & Co, RBS and Morgan Stanley (MS.N). Foster's is being advised by Goldman Sachs (GS.N) and Gresham.
(Additional reporting by Michael Smith, Sonali Paul and Ploy Ten Kate; Editing by Balazs Koranyi and Dhara Ranasinghe)