foster's bid..macca's take

  1. Yak
    13,672 Posts.
    Foster's Group / Southcorp
    Full takeover bid launched


    As expected, Foster's launched a conditional off-market takeover for the shares in Southcorp it doesn't already own at $4.17 per share in cash, valuing Southcorp at $3.6bn.

    The Southcorp board has suggested the Foster's offer is inadequate and opportunistic.


    Why is Foster's acquiring Southcorp? The strategic rationale is built on a framework which includes creating the world's leading premium wine business and Australia's leading multi-beverage business.

    We would argue Foster's has already achieved the latter, with ACNielsen scan data showing Foster's already accounts for 30% of all retail liquor sales in Australia. The former remains an aspirational target, and is based upon a belief that customer consolidation, including distributors and retailers, requires producer consolidation.

    Foster's has championed the acquisition multiple it is offering of 14.9 times Enterprise value to Earnings (before interest, tax and amortisation) as one of the largest ever paid for a wine company! While this is compelling for Southcorp shareholders, it might leave Foster's shareholders somewhat concerned until synergies are uncovered.

    Management declined to quantify revenue and costs synergy expectations; however, we estimate implied synergies of between $113m and $130m. These appear large, but then again so is the acquisition multiple.

    Could another bidder emerge? Australia has a unique and irreplaceable position in the world wine market. Icon brands and premium vineyard holdings are now in play. For global diversified alcoholic beverage companies like Allied Domecq, which have a wine business model based on a unique geographic profile to drive competitive advantage, Australia remains a large omission in the portfolio. While Diageo is not wed to the same wine business model, the latent opportunity must not be lost on it either, unless of course it is waiting to acquire Foster's at the successful completion of the Southcorp acquisition

    FGL valuation and catalyst

    Valuation: $5.13

    12-month price target: $5.45

    Catalyst: Successful completion of the Southcorp acquisition.

    SRP valuation and catalyst

    Valuation: $3.44

    Catalyst: Release of the Target Statement.

    Action and recommendation

    Foster's Group - short term Neutral, long term Outperform, volatility index low/medium

    Southcorp - short term Neutral, long term Neutral, volatility index medium

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