Ann Crotty

A slump in global equity markets was expected to assist SABMiller in its hostile bid for Australian beer group Foster’s, analysts said yesterday after SABMiller shares plunged 5.3 percent to close at R238.66. This was ahead of the 4.4 percent dip in London’s FTSE.

Yesterday’s sell-off in Europe and the US came after Australian markets closed and SABMiller’s share price weakness was in stark contrast to Foster’s climb. It closed just above A$5 (R37) indicating that shareholders were expecting a higher offer from SABMiller or a competing bid to emerge.

The appreciation of Foster’s shares followed news that the Foster’s board had unequivocally rejected the A$4.90 a share offer from SABMiller, that it described as “highly conditional”.

Analysts said SABMiller’s slump ahead of the general market weakness indicated that shareholders were concerned about the prospect of SABMiller increasing its offer. “Despite (SABMiller chief executive Graham) Mackay’s conviction that the SABMiller team can turn this company around, there are sufficient difficulties facing Foster’s and the Australian market to make the deal marginal,” said one analyst.

Chris Gilmour of Absa Asset Management Private Clients said that if the weakness in equity markets prevailed and there was no other suitor, it was almost inevitable SABMiller would succeed at A$4.90. “Right now an all cash offer is looking very attractive,” Gilmour said.

Yesterday the Foster’s board responded to by stating it “has carefully considered the proposed offer and intends to unanimously recommend shareholders reject the offer”.

The board says the A$4.90 offer undervalues the company. “In addition, the high level of conditionality further detracts from the proposed offer.”

SABMiller’s proposed bid includes a list of conditions on which the offer is based. Many of the conditions involve restrictions on actions that can be taken by Foster’s management. This is normal in a hostile bid and is aimed at ensuring Foster’s management does not take any frustrating action that would reduce the company’s value.

The Foster’s board also highlighted that the proposed offer was below the A$4.90 made in June as it would be reduced by the value of the dividend that Foster’s declares next week in its financial 2011 results. That dividend is expected to be around 15 Australian cents a share. In the conditions SABMiller said it could not be above 15.25c a share.

The A$4.90 represented a premium of 8 percent on Foster’s share price at the time of the initial announcement in June. The Foster’s board believes this is not a sufficient premium for control of the company. Analysts who support this view argue that SABMiller’s bid is opportunistic as it comes after four years of declining returns at Foster’s. They refer to Foster’s very attractive operating margins and argue that the disposal of the wine operation and the appointment of a new chief executive mark a reversal of fortunes. Business Watch, page 2