LONDON SABMiller SAB.L is the early favorite to buy the highly profitable Foster's beer business as its rivals are either paying off debts from recent deals or will struggle with firepower to swallow Australia's biggest brewer.
Foster's Group FGL.AX gave up on its twin-track beer and wine strategy back in May after massive write-offs on its ailing wine business and will split the two in 2011. This has sparked talk the beer operation might be snapped up post-demerger for a price of over $10 billion.
The Australian beer market is highly profitable despite little overall growth, but the opportunity is likely to be passed over by three of the world's top brewers, Anheuser-Busch InBev (ABI.BR), Heineken (HEIN.AS) and Carlsberg (CARLb.CO), due to big debts.
London-based SABMiller is keen to close the gap with world number one brewer AB InBev after a $50-billion buy of Anheuser Busch by InBev in late 2008, and sees the Australian market as very attractive in terms of profit margins and pricing power.
"We see SABMiller looking to correct the size gap with ABI.... An acquisition of Foster's would also reweight the EBIT portfolio from around 75 percent emerging markets to around 60 percent," said analyst Ian Shackleton at brokers Nomura.
The brewer of Miller Lite and Peroni is largely focused on fast-growing emerging markets, but analysts say Australia has its attractions as the most profitable market in the world per liter of beer brewed and Foster's has a half share of a virtual duopoly where annual price rises have driven profit margins.
Other smaller groups such Japan's Asahi Breweries (2502.T), Canada's Molson Coors (TAP.N) and Coca-Cola Amatil (CCL.AX) have shown interest, but analysts say the size of a transaction would be bigger that the market value of the first two and a deal with Coca-Cola Amatil will have limited cost savings.
"SABMiller has not done a really big deal since 2005, and although Foster's is not in its preferred emerging market areas, we think SABMiller will be very interested in the Australian beer market," said one investment banker.
Then, SABMiller bought Colombia's Bavaria to give it leading positions in the emerging markets of Peru, Ecuador, Panama and Colombia, but it has good experience of mature markets buying Miller in 2002 and forming the MillerCoors venture in 2008.
Matthew Webb at JP Morgan Cazenove has identified three large potential targets for SABMiller. The first two, buying out MillerCoors from partner Molson Coors and purchasing Africa's Castel, would require the willingness of controlling families to sell, leaving Foster's as the only large-scale potential target.
With AB InBev still absorbing Anheuser, world No 3 Heineken agreeing to buy Mexican FEMSA's (FMSAUBD.MX) beer unit earlier this year, and Heineken dividing up Scottish and Newcastle with No 4 Carlsberg in 2008, all are focusing on paying off debt.
Webb puts a valuation on Foster's beer business at $11 billion or 13.3 times historic core EBITDA profits, toward the upper end of recent valuation with Heineken-FEMSA and InBev-Anheuser Busch deals both done at 11 times and Heineken/Carlsberg's S&N takeover priced at 15 times.
Foster's has its attractions with Australia being the world's eighth-most profitable beer market in the world, and has a 52-percent market share against Kirin-owned (2503.T) Lion Nathan with 43 percent. Solid price rises over the years have led to high beer profit margins.
Foster's has sold off most of its beer empire outside Australia, with Heineken owning the brand in Europe and SABMiller the beer brand in the United States and India.
Of the other possible bidders, Asahi has boasted of a $9.2-billion war chest for the next five years, but its deals in 2009 like buying Cadbury's Australian soft drinks for $995 million and a near-20 percent stake in China's Tsingtao Brewery (600600.SS) for $667 million suggest that a Foster's move would be a stretch financially, say analysts.
MolsonCoors has a near 5-percent derivative-based stake in Foster's but a full bid from the brewer largely based in the United States, Canada and Britain would be a big stretch and require equity to be raised, diluting the controlling family.
Two months ago, a joint venture between SABMiller and Coca-Cola Amatil opened its first brewery in Australia to brew Bluetongue beer and global brands such as Peroni and Grolsch, but analysts say a deal for Foster's by Coca-Cola Amatil would only produce cost savings of A$50 million a year and again be tough financially.
Analyst expect the Foster's split to commence in the second quarter of 2011 and see any early bids as unlikely as they would require a bidder to take on the risks and costs of separating the beer and wine businesses.
(Editing by Sitaraman Shankar)