E-Malt.com News article: Australia: Analysts unsure Foster’s may be taken over soon

Foster's Group Ltd. was officially unshackled from its underperforming wine assets on May, 7 but the market is unsure that a long-mooted takeover of the iconic Australian company is imminent, The Wall Street Journal reported on May, 10.

Foster's is now a pure-play beer outfit, valued by investors on May, 7 at A$8.9 billion on its first day of trade on the Australian Securities Exchange. The wine assets, housed in new entity Treasury Wine Estates Ltd., were valued by the market around A$2.1 billion.

Since Foster's bought it 15 years ago, the wine business has been plagued by grape gluts, bad weather, the financial crisis and a strong Australian dollar making it difficult to grow sales in key markets such as the U.S.

The asset was considered a poison pill for any potential suitors, and the beer group's share performance on May, 7 shows that the demerger has already had its desired effect of increasing shareholder value.

Before the demerger, the old Foster's had a market capitalization of A$10.6 billion. The market is now valuing the two new companies combined at A$11 billion.

Australians are among the biggest beer drinkers in the world, and the nation's population growth is forecast to outstrip the U.S. and Western Europe, making it an attractive place to invest.

Goldman Sachs analysts have also noted that Australia has a stable duopoly beer market, with the top two players having a combined market share of close to 90%.

But the sheer size of the deal that would be required to buy Foster's limits the number of potential acquirers, and the current strength of the Australian dollar could be putting them off.

"We remain unconvinced that bidders are lining up," Citigroup analysts said.

While the broker has applied a 25% bid probability in its A$4.50 a share valuation of the new Foster's, it said the strong Australian currency makes the company more expensive to foreign suitors, while its financial metrics are currently unattractive. "The Foster's share price needs to go down before it can go up," Citigroup said.

Foster's shares opened trading at A$4.57 on May, 7, down from their last trade of A$5.48 when wine was still part of the business. Like Citigroup, analysts were looking for Foster's to be valued somewhere around A$4.50 post-demerger, so that day's performance was broadly in line with expectations.

Goldman Sachs has valued the demerged Foster's at A$4.70 a share, partly thanks to a favorable ruling in a tax dispute this week, and factored in an extra 30 cents to reflect the possibility of takeover activity. "Accordingly, we expect Foster's to trade between A$4.70 and A$5.00 in the near term," the analysts said in a note last week.

The number of potential suitors, however, could be limited to just a few such as SABMiller PLC or AB InBev NV by Foster's market capitalization, the broker added.

The strong currency, lack of global brand and Australia's isolated geography could also act as a deterrent, it said.

Still, Goldman Sachs says "there is a good chance of a takeover of Foster's on a three-year view."

Spokespeople for Fosters weren't available for comment on May, 7.


17 May, 2011