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SABMiller Sends Foster’s Bond Risk to Record: Australia Credit

SABMiller Sends Foster’s Bond Risk to Record
Foster’s last week reported a second straight annual net loss and said it will return at least A$500 million to investors as it resists SABMiller’s bid. Photographer: Simon Dawson/Bloomberg

SABMiller Plc’s hostile A$9.5 billion ($10.1 billion) bid for Foster’s Group Ltd. is sending the price to insure the debt of Australia’s biggest beermaker to a record.

Credit-default swaps on Foster’s bonds rose 39 basis points this month to 130 basis points, exceeding a gauge of global brewers for the first time since at least May 2009 when Bloomberg started compiling the data. Foster’s stock rose 2.2 percent above the offer price today, indicating SABMiller may have to raise its bid after taking the all-debt offer to the Melbourne-based company’s shareholders to bypass the board’s rejection.

“There are obviously concerns -- they overpay and they over-lever to get there,” said Scott Rundell, head of credit research at ING Investment Management in Sydney, which manages about A$15 billion of fixed-income assets. “If you go hostile in a takeover, you’re always going to end up paying a bit more, so that adds an element of risk.”

SABMiller, the London-based maker of Miller Lite, hired banks to raise $12.5 billion loans for the bid, a person with knowledge of the deal said last week. The financing, the largest for a European acquirer since Paris-based drugmaker Sanofi-Aventis obtained $15 billion in October to buy Genzyme Corp., is being sought as increased credit-market stress forces European banks to pay the most in a year to borrow in dollars.

Credit-default swaps on Foster’s debt have reached the highest since April 2009 and were above an index of food and beverage companies that includes Heineken NV and Carlsberg A/S for a sixth consecutive trading day yesterday, according to CMA prices and data compiled by Bloomberg.

Annual Loss

Foster’s last week reported a second straight annual net loss and said it will return at least A$500 million to investors as it resists SABMiller’s bid. The Australian brewer’s board says the offer is too low and comes after natural disasters and stalling Australian consumer spending dented demand.

Government bond yields dropped this month while corporate default-swaps and debt spreads surged on concern that global financial turmoil will crimp the Australian economy’s recovery from floods at the start of this year in Queensland state that were the country’s most expensive natural catastrophe.

The Australian 10-year government yield fell one basis point to 4.41 percent at 2:16 p.m. in Sydney. The rate has fallen 39 basis points, or 0.39 percentage point, in August, heading for the longest stretch of declines since 1991. The spread to U.S. Treasuries has widened to 220 basis points from 201 on July 29, according to data compiled by Bloomberg.

‘Sensible’ Bid

Yields on Australian non-financial corporate bonds widened 21 basis points this month to 224 basis points more than government debt yesterday and touched 227 on Aug. 19, the highest level since Oct. 12, Bank of America Merrill Lynch’s Australian Industrial Index shows.

The cost of insuring the debt of SABMiller increased 44 basis points in August to 130 basis points, and touched 134.5 on Aug. 24, the highest since June 2009, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps on food and beverage companies increased 27.7 basis points to 127.3 basis points in the period, Bloomberg data show.

Chief Executive Officer John Pollaers said in an Aug. 24 interview that Foster’s, the world’s most profitable independent major brewer and the maker of Victoria Bitter, is prepared to discuss a “sensible” bid from SABMiller. Foster’s shares rose to A$5.01 at 2:08 p.m. in Sydney today, more than the A$4.90 per share all-cash offer.

‘Higher Offer’

“The market does look like it’s pricing in a higher offer,” said Nathan Zaia, an analyst at Morningstar Inc. in Sydney with a “hold” rating on Foster’s. “The share price is saying it’s not going to go ahead at this price.”

To fund a takeover, SABMiller has agreed to pay interest of about 90 basis points more than the London interbank offered rate for a five-year portion of the financing, two people familiar with the situation said. The debt also consists of three-year term loans and a revolving credit line, the people said. The financing includes $8 billion of 18-month bridge loans to be refinanced with bonds, a person said.

Bond Drought

Companies are shunning Australia’s bond markets as declining retail sales and rising unemployment fuel concern that the developed world’s highest benchmark interest rates and the Australian dollar’s climb to a record are retarding growth outside the mining industry.

The so-called Aussie, the world’s fifth-most traded currency, climbed 20 percent over the past year and touched $1.1081 on July 27, the most since exchange controls were scrapped in 1983. The currency traded at $1.0663 as of 2:52 p.m. in Sydney today.

The Reserve Bank of Australia raised interest rates by 175 basis points between October 2009 and November 2010 to cool inflation amid the country’s biggest mining boom in more than a century. The central bank aims to keep inflation at an annual average of between 2 and 3 percent.

Bond investors are estimating annual consumer-price gains will average 2.60 percent over the coming five years, based on the gap between yields on inflation-linked debt and notes that aren’t indexed.

‘Taking a Punt’

Andrew Butcher, an external spokesman for Foster’s at Butcher & Co. in Melbourne, declined to comment. Jim Kelly, a spokesman for SABMiller at its public relations firm in Australia, FTI Consulting, made no immediate comment.

Under SABMiller’s proposed takeover, the company’s net debt would climb to about 3 times earnings before interest, taxation, depreciation and amortization from about 1 times Ebitda, then-Chief Financial Officer Malcolm Wyman said in June. That’s higher than the company’s optimal ratio of between 2 and 2.5, he said.

SABMiller would be left with an “investment grade” credit rating after buying Foster’s, said Wyman, who retired last month. Moody’s Investors Service rates Foster’s Baa2, two levels above junk status. SABMiller is rated one level higher at Baa1.

Without a recommendation from the Foster’s board, SABMiller may not have a clear picture of the nature of the business, increasing the risks associated with the deal, said Rundell at ING Investment Management.

“If you’re a hostile bidder, you don’t always know what the exact assets looks like,” said Rundell. “You’re taking a bit of a punt. Bridging loans are a bit more expensive up front, but allow you to get in there and have a look, figure out the asset profile, and how your debt profile needs to look with Foster’s as a part of it.”

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