Much of the fizz went out of the Fosters’ share price yesterday, despite the group producing a profit that was better than market forecasts.
You would have thought that a solid profit, even accounting for the impact of the stronger dollar, might have raised the level of speculation about a possible offer.
But no it didn’t, despite the fact that the separation of the two businesses in Australia is all but finished, which would make it a more attractive buy.
The shares fell 27c, or 4.3%, to $5.99, reversing much of the 44c (7.4%) rise on Monday which was driven by speculation that SABMiller, the world’s second largest brewer, was stalking Fosters with the aim of snapping up the CUB brewing business once Fosters separates its beer and wine business in 2011.
It’s not the first time these stories have emerged since 2006; there have been at least two bursts of speculation that a "foreign’ beer group was stalking Fosters.
The previous candidate was Molson Coors, which has a 5% stake via an option deal.
Each time the stories emerge, the Fosters’ share price surges, and then falls away as the tales lose their impetus, and no stalkers appear.
But those stories were before Fosters set entrain the separation of its beer and wine business as it finally rejected the idea that there were synergies and cost savings from combining two types of alcohol that have very different marketing requirements and messages for consumers.
That separation is largely complete in Australia, as Fosters confirmed yesterday, so the way could be open for a cleaner bid via a high price approach to Fosters next year.
But the wines business is providing a nice defensive hedge for the Fosters board at the moment, protecting it from takeover because the wine business is unwanted here and globally thanks to overproduction, weak sales in key markets and intense competition.
Foster’s chief executive officer Ian Johnston said evaluation of issues, costs and benefits of a potential demerger were on schedule and the operational separation of its wine and beer operations in Australia was now substantially complete.
"Management, logistics and capital structure deliberations are progressing well with the process of seeking the necessary tax rulings to commence shortly,’’ he said in a statement.
"While no final decision has been made, the timeline for a potential demerger remains the first half of calendar 2011."
The 4.1% fall in net profit reported yesterday excluded the $1.27 billion in write-offs from the faltering wine business that have already been announced.
Weaker demand for bulk beer in Australia (but not premium beer) and the strong Australian dollar hit the company’s profits, but the group had already alerted the market to the probable impact in previous trading updates.
Foster’s said net profit before one-off items fell to $711.3 million from $742 million in 2009. That was well above the $680 million market consensus from analysts.
Sales fell 4.8% to $4.461 billion. CUB earnings rose 5% to $904.1 million and included $34 million of benefits from efficiency programs.
Foster’s said that in 2010 its wine business, now called Treasury Wine Estates, had generated stronger earnings in the second half on the back of improving sales focus and benefits from efficiency programs.
On a constant currency basis, earnings rose 20.5% to $221.3 million, but unfavourable exchange rate movements reduced earnings by $123 million.
Besides SABMiller, Asahi Breweries of Japan is said to be interested in Fosters’ beer business as it seeks to follow its more aggressive peer, Kirin, offshore.
Kirin already has a big foothold in the Australian beverage market, controlling Lion Nathan, National Foods, Dairy Farmers and Berri Fruit Juices
SABMiller already has an involvement in Australia with a joint venture with Coca Cola Amatil in that company’s emerging Blue Tongue brewing business. Coca Cola Amatil is the Australian distributor of some SABMiller brands such as Peroni of Italy.
A move on CUB would almost certainly force divestment of the stake in the Coca Cola brewing business. Cocoa Cola Amatil’s CEO Terry Davis told Business Spectator earlier this month he couldn’t make the numbers stack up on a Fosters takeover for his shareholders.
But Asahi could make the buy with no restrictions, apart from foreign investment rules (which would apply to SABMiller).
The Japanese companies are facing falling sales and profits and need geographical diversification, and have been paying high prices (or offering them) to achieve it.
