LONDON World No.2 brewer SABMiller SAB.L is set for a tough battle to turnaround its Australian Foster's acquisition as its beer volumes sink and it loses key import contracts which will stretch management to meet new aggressive targets.
Investors are unconvinced that SABMiller, which has built up its business around fast-growing emerging markets to become the biggest brewer there, made the right move in buying the No.1 player in mature market Australia when its beer volumes, profit and market share were all going south. SABMiller's shares have underperformed its main rival Anheuser Busch InBev (ABI.BR).
SABMiller spent $11.8 billion late last year on Foster's and set out ambitious targets to reverse the decline of the perennial underperformer in an Australian market where beer has lost out to wine and volumes have been flat for nearly 20 years.
"We bought into the SABMiller emerging market story and Foster's dilutes that. The size of the task in Australia makes us cautious as we do not hold its optimism for a quick turnaround," said one top ten SABMiller shareholder.
Last week, the Miller Lite brewer reported Foster's volumes of beers like Victoria Bitter, Carlton Draught and Pure Blonde dipped 4 percent in its year to end-March due largely to a weak Australian economy, poor summer weather and management distractions during the bid battle.
This compared to the SABMiller group which saw an overall 3 percent annual volume rise for its beers such as Peroni, Castle and Grolsh with Africa growing volumes as fast as 13 percent and Latin America by some 8 percent.
"SABMiller has turned around difficult situations before but those have often been from dominant market share positions. Australia is a tough beer market with two big powerful retailers," said another major shareholder.
The Australian beer market is a virtual duopoly between Foster's and Kirin-owned (2503.T) Lion Nathan, and Foster's has seen its edge in market share diminish with both big brewers now having a market share of around 45 percent each.
SABMiller's takeover of Foster's prompted the loss of certain license and import arrangements for Modelo-owned GMODELOC.MX Corona, Stella Artois (ABI.BR) and Asahi (2502.T) beers with combined annual volume of 915,000 hectoliters out of an Australian overall annual market of 18 million hectoliters.
Corona was a major blow as it was the clear leader in the growing Australian imported beer sector and accounted for two-thirds of SABMiller's lost volume, while the Mexican beer is now being distributed by its arch-rival Lion.
Analysts estimate the loss of these three brands could cut Foster's profits by $70-100 million from a base of $735 million for the year to end-March, although SABMiller will be looking to minimize any lost volume by pushing its premium beer Peroni.
"I think Foster's will be a reasonably long job to turn around as it is relatively unusual of SABMiller to acquire business leadership in a mature market," said analyst Martin Deboo at Investec Securities.
He remains a pragmatic buyer of SABMiller shares as the group still earns around 70 percent of profits from emerging markets, but the Foster's move has made him more cautious as it cut that proportion from around 80 percent.
In March, SABMiller announced its medium-term targets for Foster's to see volumes increase 1-3 percent, revenues rise 5-8 percent, and margins to gain 60-80 percent basis points a year before cost synergies from the deal of A$180 million by year four.
"Foster's guidance remains aggressive in our view and we would expect SABMiller to continue to underperform the rest of the beer group. We question the SABMiller premium to its peers," said analyst Pablo Zuanic at Liberum Capital, who prefers shares of the world's No.1 brewer AB InBev.
SABMiller shares have gained 5 percent this year compared to a rise in AB InBev of 16 percent, while the former trades on 15.3 times consensus 2012 earnings to AB InBev's 14.3.
Analyst Ian Shackleton at Nomura points out that two retailers, Coles owned by Wesfarmers Ltd WES.AS and Woolworths Ltd WOW.AS, have rapidly expanded their market share and now sell two-fifths of all beer drunk in Australia.
This virtual retail stranglehold puts pressure on both Foster's and Lion to improve their beer offering, while the retailers have introduced their own private label beers as Coles imports from Vietnam and Woolworths has a brewery in Perth.
Analysts worry SABMiller's Foster's deal reflects its Miller purchase in 2002 when SAB bought into an effective duopoly in a low-growth U.S. market and gave the brewer a long-term headache.
In the U.S., SABMiller did have advantages with Miller as it took its pricing from market leader AB InBev, avoiding a price war, and gained from cost savings from merging its U.S. operations with Molson Coors (TAP.N) in 2008 to form MillerCoors, they added.
SABMiller Chief Executive Graham Mackay has argued Foster's is in a better position than Miller was in 2002 as Foster's has growing craft beers like Fat Yak and Matilda Bay and ciders such as Strongbow and Bulmers as well as its mainstream beers.
SABMiller's Asia Pacific and Foster's chief Ari Mervis is optimistic the Australian business will be in beer volume growth by the end of 2012 as it recovers from last summer's heavy rainfall and the distractions of the bid battle.
(Editing by Jon Loades-Carter)