What is a fair value for Foster’s? It is extraordinarily difficult to decipher that from one of the most confusing demerger documents ever prepared.
That’s one of the reasons the raiders are quickly putting pressure on Foster’s. They want the company effectively sold off before it announces its financial position and before the market realises the upside in what has, for a long time, been a badly-managed brewer – all the spare beer money went into wine and Foster’s did not handle retail selling skilfully.
At the same time, institutional shareholders are desperate for profits in a tough market year so they can pay executive bonuses. It’s a very clever raid.
Back on May 13, writing in our sister publication The Eureka Report, I attempted to take some of the mystery out of Foster’s by attempting to calculate its pro-forma financial position at June 30, 2010. I was stunned by what I found. It is a stock that is a mirror image of Transurban, which is able to distribute almost all its net cash flow after capital expenditure to shareholders, either through distributions or buybacks.
In part, I wrote: “Foster’s EBIT of $884 million is boosted to $945 million when we add back depreciation to determine trading cash flow. But from that we need to deduct the annual interest bill of $180 million and a theoretical tax provision that I have calculated at $212 million. We should also deduct capital expenditure of $87 million, which gives us a theoretical cash bounty to distribute of $466 million, or 24.2 cents a share.
“But it gets better – much better. Foster’s this week won a dramatic tax decision in its favour, arising from the days when it was Elders. The company has said in a statement it will seek to recover $256 million in taxes it has paid but I believe this ruling will ultimately deliver Foster’s tax losses of about $1.5 billion. The final figure might even be higher.
“So if we calculate Foster’s theoretical before-tax profit at $704 million – $884 million less interest of $180 million – that means that the company will not pay any tax for at least two years.
"The company needs to spend about $90 million a year in capital expenditure, which is mostly covered by depreciation of $62 million. So let’s allocate $54 million to top up capital expenditure and other items.
"On that basis, Foster’s has about $650 million, or just over 33 cents a share, to distribute via dividends or buybacks over the next two years. Assuming it distributes all via dividends, that would provide a yield of 7.5% on yesterday’s share price of $4.39.”
As Eureka readers on May 13 understood, 7.5% was a ridiculously high yield, yet because of the market’s lack of understanding, that’s where the share price stood until bid speculation arrived.
I have since discovered the current debt is much less than the theoretical June 30, 2010 amount I estimated, and Foster’s is looking at an interest bill nearer to $140 million than $180 million.
So the effective distributable amount is above 35 cents a share, which would give a yield of 5.8% on the basis of a $6.00 price and 5% on the basis of $7. Transurban yields just over 5%.
You can correctly argue that my distributable yield is boosted temporarily by the tax losses acquired via court action. On the other hand, the interest bill is still abnormally high given Foster’s has taken on the old US dollar wine debt and needs a currency hedge. An overseas buyer would not need to do that and would use much greater leverage.
But Australian institutions are not much for bothering about assessing long-term value for superannuation clients in takeover situations, as we saw with Axa. They live for the game and the game has begun.
