Foster’s Takeover? Not Now, That’s For Sure

This story features FRUGL GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: FGL

By Rudi Filapek-Vandyck

Foster's ((FGL)) shares have been on my personal radar for a while. This is predominantly because the share price is well above levels of April this year, when major indices for the Australian share market peaked.

Foster's is not the only one. There is, for example, also ResMed ((RMD)). Most other stocks that are trading higher today than in April, however, are small cap miners and developers such as Lynas ((LYC)), Avoca Resources ((AVO)) and Perseus ((PRU)).

Foster's has also been among the few that have consistently been trading above their consensus price targets. Another reason to remain on my personal radar.

A quick look at consensus forecasts in Stock Analysis on the FNArena database teaches us, however, that the market was not expecting much from the company's fiscal year ending in June, and expectations are that FY11 will merely take the company's earnings per share back to levels of FY09.

But Foster's shares are trading on high multiples, as can be seen on Stock Analysis, and this would imply there is another reason why investors have been buying Foster's shares and held on to them.

The answer came yesterday when the share price jumped a long distance from the consensus price target on media speculation SABMiller might be eyeing the company's beer operations. Today, however, Foster's share price is pulling back a lot closer to its consensus price target, signaling something important has changed.

Was it the company denying it had any knowledge about a corporate approach by SABMiller?

I doubt it.

Looking through the company's FY10 report, released this morning, I couldn't help but noticing the beer and wine group's naked EPS (after all writedowns have been taken into account) has printed 22c for the year ending in June.

That's materially worse than the 28.7c consensus was expecting to see (see Stock Analysis).

In addition, management's guidance, except for ongoing strong fundamentals for the beer operations, seems a bit wishy-washy. Plus there was no final dividend.

Expect to see lowered earnings forecasts in tomorrow's Australian Broker Call Report.

Equally important, however, is that the proposed separation between wine and beer at Foster's is expected to take place in the first half of calendar 2011. This makes yesterday's strong share price surge a bit of a joke, really.

Once upon a time, in a previous stage of my existence as a financial journalist, I used to cover Heineken in Amsterdam, while keeping a close eye on AmBev (called Interbrew at the time) in Leuven, and from the personal insights I gained at the time I can report with a near 100% certainty that none of the world's major beer producers will ever get anywhere near Australia with buying intentions as long as wine and beer remain intertwined at Foster's.

I have little doubt, however, that once the separation is a fact, Foster's will become a corporate target.

Yesterday's report in the Sunday Times that SABMiller is considering a US$10.9bn bid for Foster's beer assets does carry some credence, because SABMiller is widely considered one of likely bidders for the assets.

Investors in Australia know the company's beer operation, Carlton United Breweries (CUB), effectively operates a duopoly with no-longer publicly listed Lion Nathan, and CUB is thus an attractive asset to own.

Two stockbrokers who looked into the matter this morning, Ord Minnett and JP Morgan, fully subscribe to my view. Both point out the demerger process at Foster's is nowhere near completion (probably nine more months to go, they suggest) and it is an complex, arduous disentanglement involving creditors, bondholders and all third parties with contracts involving some sort of credit guarantee or security.

Judging by the comments published by both stockbrokers this morning, there seem to be some tax issues as well, plus capital gains tax liabilities and so forth. In other words: even if Foster's were looking to throw the towel at this stage already, it would simply be impossible because of too many complexities and unresolved issues.

Plus there's an outstanding litigation with the ATO that can still swing the ultimate value of Foster's (wine and beer combined) by some $1.1bn.

The bottom line is: don't expect any bids for the company any soon.

At today's share price of $6.01 (midday on Tuesday, 24 August, 2010) there's still a premium vis-a-vis the consensus price target, currently at $5.73. Given that the market is unlikely to forget about the takeover potential for the shares, it might well be that Foster's shares will continue trading above stockbroker targets for a while to come.

Investors will have to make up their own mind whether this is a good enough reason to own the shares in the meantime.

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