Foster’s Considers Buyback, Higher Dividends on Tax Victory

Foster’s Group Ltd. (FGL), which rejected a A$9.5 billion ($10 billion) offer from SABMiller Plc (SAB) last month, may buy back shares or boost dividends after winning a dispute with the Australian Commissioner of Taxation.

Australia’s biggest brewer will get A$390 million in cash refunds and interest, and is reviewing its “dividend policy and capital management options,” Melbourne-based Foster’s said in a filing today. After including reduced future tax, the “cash benefit” may be more than A$835 million, the company said.

Foster’s is seeking to fend off SABMiller, which hasn’t returned with a higher bid since its A$4.90 a share cash bid was rejected on June 21. The Australian brewer, which had net debt of A$1.51 billion as of June 30, may return A$1 billion through a buyback or cash payout when it announces earnings Aug. 23, according to analysts at Citigroup Inc.

“The settlement de-stresses the acquisition case for SABMiller by a material amount,” said Martin Deboo, an analyst at Investec Securities in London. The multiple of Foster’s estimated 2011 earnings before interest, tax, depreciation and amortization would be reduced to 11.6 times, which “compares favorably” to other beer deals, he said. SABMiller said June 21 its bid represented a multiple of 12.5 times.

Victoria Bitter

Foster’s rose 0.2 percent to A$5.09 as of the 4:10 p.m. close of trading in Sydney. The stock has gained 12 percent since June 20, the day before the offer was rejected, and has traded as high as A$5.23 since then.

The dispute, known as the Ashwick case, stems from deductions claimed by Foster’s corporate predecessor in the 1980s and 1990s.

“In the absence of counter bidders to SABMiller, we believe the board needs to be pro-active in painting a clear and attractive alternative growth path,” Citigroup analysts led by Andy Bowley said in a note to clients yesterday. “The company has capacity for a cash return of A$1 billion to A$1.5 billion, though we suspect A$0.5 billion to A$1 billion is more likely,” they wrote, affirming Citigroup’s “hold” rating on the stock.

SABMiller rose as much as 7.5 pence, or 0.3 percent, to 2,313 pence in London trading, and was up 1.5 pence at 2,307 as of 9:34 a.m. local time.

Focus on Beer

A purchase of Foster’s would give SABMiller access to about half the Australian beer market, including the eponymous Foster’s brand and Victoria Bitter.

Foster’s beer business had a margin, which measures earnings before interest and taxes as a proportion of revenue, of 37 percent in the 12 months ended June 2010, the company said in February, citing the most recent full year of data. That’s the widest of any independent brewer in the world, according to data compiled by Bloomberg.

The Australian brewer is focused on its business rather than talking to SABMiller, Foster’s Chief Executive Officer John Pollaers said July 3. In May, Foster’s spun off unit Treasury Wine Estates Ltd. to focus on beer.

Pollaers is concentrating on stemming market-share losses and cutting production costs to free up cash and boost promotion of brands. He’s also developing new brews to win back consumers who switched to sweeter pre-mixed drinks and craft beers.

“The outcome clearly depends on whether the Foster’s board eventually roll over at the current offer price,” said Deboo, who has a “buy” rating on SABMiller. “This in turn depends partly on how Foster’s shareholders view the buyback proposal.”

To contact the reporter on this story: Robert Fenner in Melbourne at rfenner@bloomberg.net

To contact the editor responsible for this story: Frank Longid at flongid@bloomberg.net

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