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It’s hard to see why shareholders won’t ditch Foster’s

Foster’s chairman David Crawford is under pressure from a hostile bid from SABMiller. AAP

If I were a shareholder in Foster’s, which is facing a hostile takeover bid from global brewer SABMiller, there are three questions that I would ask myself before deciding whether to sell my stake.

First, what is the market outlook for Foster’s, in terms of its consumer growth and its market share?

Second, does the company’s current management have the demonstrated capability to deliver and meet its own growth objectives?

Third, is the share price under the current management likely to exceed the $4.90 bid (less newly declared dividends) on the table from SABMiller, or will it fall further when the offer is withdrawn?

Hopefully it will be sweetened above $5.00 as is often the case in such deals – so keep a close watch. I would expect a sweetener.

These are important questions that need to be answered before deciding on whether to take the money.

Here’s why.

Foster’s has languished until this recent bid, following some significant problems with its acquired wine business. It has seen a significant decline in consumer demand for its products, with its beer sales falling. Its share price hit a low of $4.20 in May and has bounced back on the takeover noise, but it hasn’t seen much sustained improvement in recent times.

The share price climbed during the market peak in 2007, probably due to a healthier economy and an overall market rise rather than the company’s fundamentals. The price is now around what it was in 2004-05.

Looking to the future of the share price, it’s worth keeping in mind the worsening global economic conditions, and the fact that Foster’s share of beer consumption has fallen by at least 2% this year.

The key question that shareholders need to ask themselves is this: where is the company’s growth going to come from?

The management at Foster’s has not outlined any clear strategies for the future to achieve a sustained share price significantly above what is offered. There’s no growth story for the company, so shareholders should think carefully about whether the share price is at risk of falling even further if the offer fails.

Off-market offer

SABMiller intends to make an off-market offer to shareholders, so there are no brokerages involved. It will directly contact shareholders, whose details are available through the share registry.

SABMiller will essentially go around the Foster’s board and put the offer direct to the shareholders.

There are a range of regulations around disclosure when a company begins buying up shares in another company, but these don’t apply in this case because SABMiller has come straight out and said that it’s making a hostile bid.

This is typical of their style – they want to take over the entire company and control it.

SABMiller has developed all of its brands through acquisitions. They started out as a small South African brewer, and now their brands include Nastro Azzurro in Italy, Miller in the United States, and the Dutch brand Grolsch.

Every few years they go out and buy a large existing brewer with the aim of growing their international footprint. Consequently the company has a significant presence in every part of the globe apart from Australia.

By acquiring the Foster’s brand, they aim to become a truly global brewer. Their only competitor in that space really is the Heineken Group, Anheuser-Busch InBev, and the Japanese companies, Kirin and Asahi.

If the bid fails, then the Foster’s share price could drop dramatically given its current market outlook.

Hurdles ahead

Like all takeover bids, SABMiller’s approach faces some regulatory hurdles. The Federal Government’s Takeovers Panel becomes involved in certain circumstances.

There is also an issue for the Australian Consumer and Competition Commission (ACCC), in terms of market dominance. But that doesn’t seem be a particularly big issue, given that there is quite a bit of competition in the market.

The main issue will be getting the deal past the Foreign Investment Review Board, however this wouldn’t seem to be particularly difficult either.

There is also the question of how the market rates the deal. SABMiller’s share price on the market in Johannesburg has suffered somewhat since this bidding process began.

If the market doesn’t think that a takeover is a good idea then the buyer – SABMiller in this case – often sees its share price fall somewhat. Meanwhile, the target – Foster’s – gets a boost in its price.

This might complicate the price ultimately offered for Foster’s. But nonetheless, shareholders will need to decide whether they feel that the offer price is appropriate.

This is a serious gamble, because at some point SABMiller may well lose interest.

They are making an all-cash offer. It has to be a straight cash offer if it’s made on the market, but it doesn’t have to be all cash if it’s made off-market directly to shareholders. If SABMiller were to offer some of its own shares as part of the deal, this could a cash-and-paper offer.

But this probably wouldn’t be very attractive to domestic investors, who make up a large chunk of the shareholder base at Foster’s.

On balance, and given current economic conditions, I believe that shareholders will ultimately accept this deal.

All brewers are facing an uncertain global demand outlook, so shareholders will probably see this as a good time to liquidate their holdings while they can still get a good price.

The Foster’s board is saying that the offer price is far too low, perhaps pointing to higher prices from the past. So they could claim that the average price for the stock is between $5.50 and $6.00, and the offer is undervalued by 10% to 20%.

Of course, shareholders could wonder why, if the company is worth so much, this isn’t being reflected in the share price now.

One important difference between on-market and off-market selling is that if SABMiller decides to sweeten its offer down the line, shareholders who have already agreed to sell-off market in the direct offer will receive the higher price for their stock when the deal finalises.

This doesn’t occur in on-market sales, where shareholders receive the prevailing price.

So unless there is some fundamental reason offered by the board to justify its higher price recommendation based on fundamentals, it is difficult to see why one shouldn’t sell.

That is assuming that SABMiller increases its offer marginally by around 5% to 10% which I would expect. It also depends on the extent to which they have hedged the Australian dollar which has fluctuated around 5% to 10% since this deal appeared.

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