- June 8, 2010
How bitter will Victoria Bitter be for Foster’s bondholders?
Foster’s Group, owner of the namesake Australian beer brand, well known pretty much everywhere except in its own homeland, and Australia’s most popular domestic beer VB, or Victoria Bitter had previously announced on May 26, 2010 its intention to separate its lagging wine business from its profitable beer business by spinning of the wine unit in 2011.
The move was somewhat expected as early as the beginning of May when Foster’s Group credit default swaps spiked up from the 50 bps area to the 70 bps area on rumours of an impending announcement which ultimately came a few weeks later. Foster’s Group CDS appear to have found a trading range in the high 60 to low 70 bps range amid uncertainty over what the exact division of debt between the two companies will be.
Foster’s CDS has generated interest again on rumours of new bidders emerging from China. Several media outlets are quoting a story from The Australian Financial Review that Bright Food Group may bid for the lesser-contested wine business. Another Chinese company, Tsingtao Brewery, is also reportedly interested in the beer business.
Analysts are now expecting both businesses to potentially become takeover targets given the size of Foster’s wine business (Australia’s largest and the world’s second largest) and the profitability of Foster’s Australian beer business. BusinessWeek reports that Foster’s beer business, called Carlton & United Breweries, generates 85% of the total company’s current earnings and runs a 38.5% profit margin. In comparison the world’s largest beermaker, Anheuser-Busch InBev, sports a 27.9% profit margin while Heineken and Asahi sport profit margins of 12.4% and 5.6%, respectively. While the beer business has always been held in high regard by competitors, they have mostly stayed clear of ever seriously considering bids on the company “because of the work needed to turn around the wine operations amid a global glut.”
Reuters reports that “Foster’s wine business faces oversupply and weak demand. It accounts for almost all of the group’s 32 percent overseas revenue and faces headwinds from currency moves. While global wine production since 2004 has stayed at 25-28 billion liters, consumption has fallen amid a global downturn. Global oversupply is so marked that Australian winemakers have plowed up vineyards, the French are turning wine into ethanol and, in the United States, Napa Valley wine growers are lobbying banks for refinance.”
Lagging wine business aside, the competition for Foster’s beer assets is heating up. Early potential bidders included SABMiller (which already owns rights to Foster’s in India and brewing rights in the US), Molson Coors (which effectively already owns 5% of the company), Asahi Breweries, Suntory Holdings, and Sapporo Holdings. Previously rumoured bidders that are reportedly not interested anymore include Coca-Cola Amatil.
Foster’s wine business is reportedly worth around A$3.3 billion while the beer business is worth around A$13.5 billion (~US$11 billion).
Foster’s Group is currently trading up about 1.5% to A$5.63 in Sydney trading today on increased volume (over 13 milion shares as of this report). The shares could be worth over A$7 in a takeover if priced using a multiple similar to the 12.5x forward earnings or A$3.5 billion that Japan’s Kirin Holdings paid for the 54% of Lion Nathan it didn’t already own last year. Lion Nathan is Australia & New Zealand’s second largest beer maker and together with Foster’s 50% market share control over 90% of the Australian brewery business. Foster’s forecasts EBITS of between A$1.05 – A$1.08 billion for the year (12.5x A$1.08=A$13.5 billion).
Despite all the attention the beer business has been getting, it is still business as usual for the whole company including its wine business with Foster’s recently signing new US distribution agreements for its wines with Glazer’s Distributors.
Separately, SABMiller credit default swaps and Heineken CDS are trading in the 95-100 bps area. SABMiller CDS are relatively unchanged over the past week and year-to-date while both are up about 20% over the past month. Beer makers saw their CDS hit their highs back in March 2009 when Heineken reached 250 bps and SABMiller reached 200 bps. Despite being major users of derivatives, those highs were due to the systemic factors that brought down the overall market during that time rather than their own derivative activities.