The announcement of the $12.3 billion agreed takeover of Foster’s came out at 7.01pm last night, giving newspapers a rare genuine splash to surprise their readers with.
As everyone from Dick Smith to Barnaby Joyce is attesting, there is a degree of sadness in the takeover which will strip the ASX of one of its most storied top 20 companies.
The $5.40 a share deal will almost certainly go through because the pricing is quite attractive, opportunistic hedge funds will be keen to take a quick profit and retail shareholders are usually reluctant to ignore a board recommendation.
That said, it is an affront to the takeover rules that straight takeovers are now being approved through a scheme of arrangement which only requires a one-off super majority vote of 75% in favour. Schemes were introduced to help facilitate genuine mergers, which this is not. And that’s 75% of those who bother to vote, not 75% of the entire register.
With conventional takeovers, you had to actually receive an acceptance from 90% of all shares before moving to compulsory acquisition, so anyone with a 10% stake could literally force a takeover target to stay listed or solicit a higher offer.
While Australia has produced a few genuine international success stories such as CSL, Computershare, Cochlear, Westfield, News Corp and the surfwear triplets of Billabong, Rip Curl and Quiksilver, the overall picture is one of failure. Australian corporates have been absolutely hopeless at building and retaining globally significant companies in the fast-moving consumer goods (FMCG) space and the Foster’s sale removes the biggest of the remaining locally-owned domestic players.
The Foster’s story is one of a great Australian business whose management perennially squandered the beer cash moving into other unrelated operations.
John Elliott’s expansion into Canadian brewer Molson and UK brewer Courage didn’t finish up too badly, but his successor Ted Kunkel exited both of those businesses in the mid-1990s because Elliott almost sent the company broke after going on a debt-funded diversification strategy. The worst element of this was Elders Finance, which lost billions lending to spivs and heavily indebted corporates alike just as Paul Keating was meting out 17% interest rates and the recession we had to have. How on earth did a brewer become a reckless bank?
Having staved off receivership courtesy of a BHP-backed $1 billion rights issue in 1992, Kunkel then launched the ill-fated diversification into wine with the $500 million Mildara Blass takeover in 1996. But the real folly came with the $3 billion Beringer Blass takeover in 2000 and, after Kunkel had departed, the $3.7 acquisition of Southcorp in 2005.
Having spent more than $7 billion of the beer-generated cash building the world’s biggest premium wine company, Foster’s admitted defeat this year by demerging Treasury Wine Estates, a company which today has a piddling enterprise value of just $2.4 billion.
After blowing up $5 billion on wine alone, the Foster’s board, especially veteran director and chairman David Crawford, deserve to be turfed off the payroll, which is what the $12.3 billion SAB Miller takeover will do.
The acquisition is no small beer for the world’s second biggest brewer which generates annual sales of $US27 billion and has a market capitalisation of $US34 billion, second only to Anheuser-Busch-InBev which is worth $US61 billion and has revenues of $US37 billion. Heineken comes in third with a market capitalisation of $US20 billion and sales of $US24 billion.
But for incompetent management, Melbourne-based Foster’s would have itself finished up as one of the big three global brewers.
The old South African Breweries started off its life entangled with the Anglo American/Oppenheimer/De Beers conglomerate which dominated corporate life in South African during the Apartheid era. It ultimately demerged from Anglo and left for London in the post-Apartheid environment as it parleyed a 90% market share in its home South African into a global machine through a brilliantly executed acquisition strategy, which is precisely what Foster’s should have been able to do had Elliott stuck to beer.
I visited one of their breweries in Johanesburg in 1995 and remember laughing when one executive described how their distribution strength enables them to crush any challenger who got more than 1% of the market.
Distribution strength and iconic brands are what allows the Foster’s Australian beer business to produced cash profits of more than $700 million a year. The biggest profit generator is still VB which has about 20% of the market courtesy of the most successful advertising campaign in Australian history.
As the late actor John Mellion would have said, as a matter of fact it’s SAB-Miller which has a taste for VB now after three hard months slugging it out with the Foster’s board.
SAB Miller shares fell overnight on fears they overpaid and it is hard to see how it will grow Foster’s profits given recent steep volume declines plus the inevitable head-butting with the world’s most dominant liquor retailer, Woolworths.
Australians are also moving slowly to support more premium imported brands, along with boutique micro-breweries.
The Adelaide-based family-owned Coopers will no doubt enjoy a market share boost from all the publicity about the iconic Foster’s being gobbled up, but there won’t be any big job losses or restructuring because SAB Miller doesn’t have a meaningful presence in the Australian beer market.
Expect to see more SAB Miller brands such as Grolsh, Peroni, Pilsner, Miller and Castle on the back of those hundreds of Linfox trucks which distribute the amber liquid to licensed premises across the country.