Foster’s, the Australian brewer, on Thursday sought to fend off a hostile takeover bid from SABMiller, dismissing the A$9.5bn (US$10bn) offer as “significantly” undervaluing its business.
“The board of Foster’s, together with its advisers, has carefully considered the proposed offer and intends to unanimously recommend shareholders reject the offer,” it said in a short statement.
Foster’s added SABMiller’s A$4.90 a share bid did not fully reflect a change of control transaction.
The shares rose 6 cents to A$5.02 in morning trading in Sydney, but are down from their A$5.25 peak soon after SABMiller’s A$4.90 approach was made public in June.
SABMiller on Wednesday launched a hostile takeover bid for Foster’s after failing to persuade the Australian brewer’s board to the negotiating table in the two months since it made its initial takeover proposal.
Foster’s brief statement in what could prove a drawn out battle came after the Australian group discussed SABMiller’s bid with leading investors.
Foster’s has told investors it would be willing to engage with SABMiller or other potential bidders but is not prepared to do so at A$4.90. A person close to the situation said Foster’s major shareholders supported that stance.
“There’s been an overwhelming response from shareholders that A$4.90 is not enough,” the person added.
About two-thirds of Foster’s share register is owned by institutional investors, led by Capital Group with 7 per cent. Hedge funds own a further 10 to 15 per cent, with retail investors owning about a fifth.
SABMiller said that it would put its A$4.90 a share cash bid directly to shareholders. That is the same price indicated in its June approach, which Foster’s rejected as being too low to merit consideration.
The aggressive move by the world’s second-largest brewer by sales surprised analysts, who had expected the group to wait until after Foster’s reported full-year results next Tuesday, which are expected to be weak.
SABMiller may have been spurred to action after Foster’s share price briefly fell below its indicative offer, suggesting the market may have been wavering over whether or not a formal offer would be forthcoming. The offer also demonstrated SABMiller’s frustration at Foster’s refusal to enter discussions.
In addition to expected weakness in the upcoming results, SABMiller’s hand has been strengthened in recent weeks by the global stock market rout. Foster’s shares fell steadily earlier this month, and on Wednesday rose just 3 cents to A$4.96 on news of the hostile bid. In London, SABMiller shares were 1 per cent higher at £21.39.
A person close to SABMiller said Foster’s shareholders wanted the bid process to move forward, adding that no alternative offers had materialised since its June approach was made public by the Australian group.
By going hostile, SABMiller is not ruling out putting more money on the table – as was the case when Kraft, the US foods group, took the gloves off in its bid for Cadbury of the UK.
If the pressure results in Foster’s giving the UK-listed brewer access to conduct due diligence, that could potentially enable SABMiller to justify a higher price based on new information. However, SABMiller is not counting on gaining full access to Foster’s books, instead pointing to its knowledge of the local Australian beer market gained from operating in a joint venture there since 2006.
The group is also adamant its price, which represents 12.5 times Foster’s forecast earnings before interest, tax, depreciation and amortisation, is fair and attractive.
In a statement, SABMiller said: “As there has been no willingness to engage … SABMiller has decided to make an offer to Foster’s shareholders directly,” it said. It added it would fund the offer with the help of new debt committed by a range of financial institutions.
SABMiller prepared the ground for a fresh assault on Foster’s last week when it rounded up lenders to ensure it had bank funding in place ahead of its bid.
In note to clients this week, Citigroup said Foster’s board had “little room to manoeuvre in light of the mergers and acquisitions backdrop”. The brewer’s bargaining position had been weakened by the lack of counterbidders, industry data highlighting soft trading conditions in the brewing sector, and a resumption in markets share losses in Foster’s beer unit, according to Citi.
“We expect Foster’s to be acquired over the next 12 months (most likely by SABMiller) and now apply an 80 per cent probability to this outcome,” it said.
UK-based analysts reckon that, at the current price, SABMiller should just about wash its face with the deal.
However, some SABMiller investors have also expressed disquiet at a deal that moves the brewer away from its focus on emerging markets, from which it currently obtains more than four-fifths of its sales. Those investors would rather SABMiller paid back cash to shareholders.
With a Foster’s acquisition, SABMiller’s emerging market exposure would drop to about 70 per cent, still high relative to the peer group. The purchase would add the Melbourne-based group’s Victoria Bitter, Pure Blonde and Cascade beer brands to SABMiller’s Miller Lite, Peroni and Grolsch.
Foster’s in May spun off its unprofitable wine unit into a separate listed company – Treasury Wine Estates – to become a beer-focused business and one of the biggest developed-world takeover targets in an industry that has spent more than $142bn in deals in the past five years.
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