Foster's Puts Pressure on SABMiller to Raise Offer

Reuters and

Australian brewer Foster's reiterated its rejection of a $10 billion takeover offer from SAB Miller Tuesday, as it announced a 500 million Australian dollar, or $521 million, capital return to shareholders.

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John Pollaers, chief executive of Fosters, told CNBC: "We did engage with the offer and we continue to believe that it significantly undervalues the company.

"We are going to be a very tightly managed company with a focus on driving efficiencies in the business."

The country’s largest brewer proposed to return money to shareholders through a share buyback or capital reduction in an effort to get SABMiller to increase its 4.90 dollar-a-share offer, which Foster’s has twice rejected as too low.

“It is probably one of the few options that they have, so it’s not unexpected that they’re doing that,” said Theo Maas, a portfolio manager at Arnhem Investment Management, which does not own Foster’s shares. “But I’m not sure if in the bigger scheme of things it’ll make any difference.”

The Australian stock market appeared to agree, with shares in Foster’s barely moved by the news, inching seven cents higher to 4.97 dollars.

SABMiller, which is based in London, took its offer directly to Foster’s shareholders last week after the Foster’s board rejected SABMiller’s bid as significantly undervaluing the company.

“Given the strong rejection by the board, the ball’s in SAB’s court to put their best offer forward,” said Marcus Fanning, head of Australian equities at Colonial First State’s growth fund.

Colonial is the No. 2 shareholder in Foster’s, with its funds owning 4.8 percent, according to Thomson Reuters data. The top shareholder, Capital Group, which has a 7.1 percent stake, has declined to comment.

SABMiller, which makes Peroni, Grolsch and Miller Lite, has long been seen as the favorite to take over Foster’s given that rivals like Heineken are struggling with debt or lack adequate financing.

Foster’s, the maker of Victoria Bitter, Carlton Draught and Pure Blonde, has suffered as its market share outside pubs shrank along with its profit margins, which were also squeezed by a price war between its biggest customers, Australia’s top supermarkets.

For the full business year that ended in June, Foster’s said Tuesday that it had a loss of 89 million, after the company incurred losses on the recent spinoff of Foster’s wine business, Treasury Wine Estates.

Weak consumer spending, a shift away from beer drinking and a wet summer that pushed down demand also weighed on earnings.

Pollaers said the company was about halfway through a three-year turnaround plan, with cash flows improving and cost reductions being reinvested to promote its brands.

“The turnaround of this company is clearly on track. Market share has stabilized, correcting a long-term period of decline,” Pollaers said. “The key point is that we’re getting on with business as usual. We are running Foster’s for the long term.”

“We’re as well placed as anyone, and I would almost go as far as saying better positioned than anyone, to manage the interests of our shareholders,” he said.

Foster’s said across the industry, beer volume declined 7.3 percent in the first half and 4.6 percent in the second half, mainly because of the subdued consumer. Floods and cyclones in the eastern states over the summer also hit demand.

That rate of decline appeared to be abating, Foster’s said, with volumes down only 3 percent in July.

"The Australian beer market is going through a period of uncertainty, driven by the economic uncertainty of the middle Australian," said Pollaers.

"This is a short-term circumstance and we will recover."