If cash is king, Foster’s is in charge. The Australian beer-maker may have seen earnings per share drop 9 per cent in the last financial year, but investors a$dded 2 per cent to the company’s share price after it converted 100 per cent of its earnings before interest, tax, depreciation and amortisation into cash. Cash generation, as chief executive John Pollaers puts it, is one of the company’s “enduring qualities”. That sea of cash explains why Foster’s is the target of a A$4.90 per share hostile bid from SABMiller, its London-listed rival. It is also why some private equity groups may look to swoop in.

The attraction for private equity is obvious. Aside from generating cash, Foster’s is well established in a mature and predictable market. The numbers stack up too. Take a purchase price 15 per cent above SABMiller’s current offer – about 14 times expected 2012 operating earnings – and relatively conservative 50 per cent debt financing. If Foster’s were sold in three years at the same multiple, it would generate an attractive internal rate of return of about 11 per cent.

There is further upside. First, after resolving a long-running battle with the tax office, Foster’s will receive an additional A$835m benefit over the next few years. This could boost the investment’s IRR to more than 13 per cent. This could be lifted even further after the private equity group sends in a cost-cutting industry expert to strip the costs that prove difficult to cut as a public company.

The catch is size. At about A$12bn, a buy-out of Foster’s would make it the biggest private equity deal since the financial crisis. Pulling it off would require a consortium of like-minded private equity managers, and very supportive banks.

But, like Foster’s, many private equity groups are flush with cash raised pre-Lehman, and a large buy-out such as this could be a good way to spend it.

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