The Barbarians at the Gates of Foster’s

MELBOURNE AUSTRALIA, 27 November 2006 - The All Ordinaries resumed its ascent again last week, climbing by 0.7% to close the week just twenty-five points below the all time closing high reached on the 7th November.

And is it any wonder with all the speculation surrounding the market about private equity and leverage buyouts.  The name Macquarie Bank (ASX: MBL) pops up next to Texas Pacific and all of a sudden Qantas (ASX: QAS) shares pile on 20%.  Before that we've had PBL, Seven and Coles-Myer.

It would be easy to say that this must be the top of the market if things are going this crazy.  But surely these private equity firms are controlled by immensely clever, wealthy individuals who scour the world looking for a bargain.

Perhaps we are actually still near the bottom of the market, despite the tremendous run that the Australian index has enjoyed over the last three years.  The new capital gains tax laws for foreign investors certainly make it more attractive for them to invest here.  And given that the political environment is stable compared to many nations in South East Asia, an investment in Australia may be one way for investors to gain further exposure to this part of the world without investing directly into places such as Thailand, Vietnam and Malaysia.

Now another takeover candidate emerges from the crowd.  This time it's Foster's.  According to Melbourne's The Age newspaper, "The latest rumours - while dismissed by some market watchers as being spurred by recent private equity activity - centred on Belgian brewing giant InBev preparing to bid $7.50 a share for Foster's."  InBev (EBR: INB), was formed from the merger of Belgium's Interbrew and the South American, AmBev and owns popular brands Stella Artois and Beck's.

If InBev was successful, and did pay $7.50 per share, it would value Foster's (ASX: FGL) at over $15 billion.  Is this a likely occurrence?  Although we are less inclined than most to put a great deal of faith in these sort of rumours, if any of the global alcoholic beverage firms was likely to target Foster's, then InBev would be one of them.

InBev deserve a drink after producing a EUR3.1 billion profit from revenues of EUR11.6 billion.  Even without the benefit of Foster's profits InBev could comfortably repay the cost of buying it within three years, or just over that if we factor in financing costs.

The paper reported Macquarie Equities analysts as saying, "We cannot definitively rule out a takeover of Foster's, however we believe a bid is relatively unlikely in the short term."  We wonder if the Macquarie Equities analysts would be so kind as to rule out a takeover bid for Foster's by Macquarie bank.  Surely if anything had dependable, steady and predictable earnings it is alcoholic beverage firms!

We would think a beer company has better long term prospects than an airline which is currently enjoying favourable terms but which has no guarantees of doing so if it falls into the hands of a combination of Macquarie, Texas Pacific and other institutions.

However, there would clearly be advantages for a brewer such as InBev buying Foster's compared to a private equity consortium.  Not least is the experience that InBev currently has of brewing beers under licence.  For instance, it's UK division, Interbrew UK Ltd brews Castlemaine XXXX for distribution in the UK.

And, coincidentally, Foster's has the licence to brew the Stella Artois brand in Australia.  We are loath to use the 'S' word (synergies, seeing as you've asked), but it wouldn't surprise us at all if Foster's did become the subject of a serious takeover offer.

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