Foster’s Bond Risk Soars on Indebted SAB Bid: Australia Credit

Foster’s Bond Risk Soars on Indebted SAB Bid
A can of Foster's lager, produced by Foster's Group Ltd, center, sits alongside bottles of Peroni lager, produced by SABMiller Plc, in Slough. Photographer: Simon Dawson/Bloomberg

The stock market loves SABMiller Plc’s A$9.5 billion ($10 billion) takeover bid for Foster’s Group Ltd. Debt investors aren’t so keen.

Foster’s bond risk surged to a two-year high after the Australian brewer rejected the debt-financed offer by the world’s second-largest brewer by volume on June 21. More than $150 billion of brewery deals in five years have helped drive up beer maker valuations, making Foster’s shares the second priciest in the world, according to data compiled by Bloomberg.

“The equity holders are happy, obviously, but from a credit perspective there are concerns,” said Michael Bush, Melbourne-based head of credit research at National Australia Bank Ltd. “The key issue for Foster’s bondholders is that they may be left holding debt in a weaker entity than what they’ve got now.”

Credit-default swaps on Foster’s have jumped 9.8 basis points to 97.3 basis points since London-based SABMiller announced its offer for the Melbourne-based company, CMA prices show. They reached 99 basis points on June 27, the highest level since May 2009, and the most expensive relative to global peers in at least two years, the data show. Contracts on SABMiller, which plans to fund its bid with about $10 billion of debt people familiar with the matter said June 21, increased 24.4 basis points to 106.8 in the same period.

Foster’s shares, buoyed by expectations that a successful buyer will have to beat SABMiller’s proposal, trade with a price-to-earnings ratio of 19.25, based on estimates for profit in 2012, Bloomberg data show. That ranks the company the second dearest among 21 beverage-making peers globally. Only Boston Beer Co., maker of Samuel Adams, is more expensive.

Brewery Takeovers

Valuations climbed after global brewery takeovers reached $151.5 billion since June 2006, Bloomberg data show. Those takeovers include InBev NV’s $60.8 billion acquisition of Anheuser-Busch Cos.

Foster’s shares were unchanged at A$5.16 at 12:56 p.m. in Sydney, above SABMiller’s A$4.90 per-share cash offer. The stock, after adjusting for the spun-off wine unit, has surged 25 percent since announcing on May 26 last year it was considering a split into separate companies. The benchmark S&P/ASX 200 index has gained 7.5 percent in the same period.

Credit-default swaps on Foster’s have climbed twice as fast this month as an index of contracts on 41 food and beverage companies globally, including Japan’s Kirin Holdings Co. and Heineken NV, CMA and Bloomberg data show.

Bond Spreads Widen

The extra yield investors demand to own Foster’s $300 million of 7.875 percent notes due June 2016 instead of similar-maturity Treasuries reached 166 basis points on June 28, the highest since Jan. 3, according to Australia & New Zealand Banking Group Ltd. prices. The spread on SABMiller’s $700 million of 6.5 percent bonds maturing in July 2018 increased 22 basis points this month to 144 basis points, BNP Paribas SA prices show.

Buying Foster’s would give SABMiller, the maker of Peroni and Grolsch, access to a “resilient” Australian economy, where disposable income is increasing, SABMiller Chief Executive Officer Graham Mackay said June 21.

Foster’s said today it’s had no contact with its suitor since rejecting the offer, even after SABMiller said June 21 it would “seek engagement.”

“No contact at all,” Foster’s CEO John Pollaers said in an interview in Melbourne today. “For us it’s just business as usual. I’m not, and the team aren’t, allowing anything to distract us.”

SABMiller declined to comment, said Jim Kelly at the brewer’s media advisor in Australia, Financial Dynamics.

Economic Growth

Economists expect Australia’s gross domestic product to increase 2.8 percent in 2011 and 4 percent in 2012 as a mining boom fuels expansion, Bloomberg surveys show. That compares to growth forecasts of 2 percent this year and 1.7 percent in 2012 in Europe.

Yields on Australia’s benchmark 10-year bond climbed 5 basis points to 5.24 percent at 1:58 p.m. in Sydney today. Australian bonds are set for a sixth month of gains, the longest stretch since the period ended January 2009.

Demand for commodities has helped Australia’s currency gain 28 percent against the U.S. dollar in the past 12 months, adding to the price of a Foster’s takeover for a foreign buyer such as SABMiller. The so-called Aussie reached $1.1012 on May 2, the highest since exchange controls were scrapped in 1983, and traded at $1.0737 at 2 p.m. in Sydney today.

SABMiller’s Mackay told analysts last week that Australia is among the world’s most profitable countries to make and sell beer. It takes the average worker 12 minutes to earn enough money to buy half a liter of beer, less time than in Canada or in Spain, he said.

Drinking Beer

Australians are drinking less beer individually although population growth is increasing the overall market. Per capita consumption of beer hasn’t risen since 2003, according to the Australian Bureau of Statistics. The average Australian adult drinks 105.38 liters of beer a year, down from 114.59 liters seven years ago, the latest ABS data shows.

Foster’s has A$2.77 billion of bonds and loans outstanding, and an equity market value of A$10 billion, according to data compiled by Bloomberg. SABMiller has $9.77 billion of debt and a total stock value of $55.7 billion, the data show.

Under SABMiller’s proposed takeover, the biggest in the beer industry since 2008, the company’s net debt to Ebitda ratio would climb to about 3 times from about 1, Chief Financial Officer Malcolm Wyman said last week. That’s higher than the company’s optimal ratio of between 2 and 2.5 times, he said.

Credit Ratings

SABMiller would be left with an “investment grade” credit rating after buying Foster’s, Wyman said. For “attractive” deals, SABMiller could tolerate a ratio as high as 3.5 times, he said. Moody’s Investors Service rates Foster’s Baa2, two levels above junk status. SABMiller is rated one level higher at Baa1.

A takeover by SABMiller would help both companies, New York based Moody’s said in a June 27 report. Foster’s would benefit from being part of a materially larger and higher-rated company, while SABMiller would get access to a profitable cash-generating business and reduce its reliance on developing markets, Moody’s said.

Still, “absent an equity injection, a deal would add substantial debt to SABMiller’s balance sheet at the outset and weaken its financial profile,” Moody’s said.

SABMiller has earned a reputation for not overpaying for assets. Mackay has made more than two dozen acquisitions since he moved the company’s listing to London in 1999. Foster’s, the world’s most profitable independent major brewer, would be his biggest purchase yet and would land him about half the Australian market and the top-selling brew in Victoria Bitter.

“We are beer people,” and Foster’s profit margins could widen under SABMiller’s ownership, Mackay said June 21. He couldn’t specify the potential cost savings of any deal. SABMiller expects a takeover to boost earnings in the first year.

Foster’s share of the Australian market fell to about 50 percent at the end of June 2010, down from 54 percent four years earlier, the company said in February.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE