Mergers and Acquisitions Case Study - Essay Example

? Mergers and acquisitions case study Introduction An acquisition refers to instances in which one firm purchases another from its shareholders and gains control of the firm. One firm bids another in the event that the potential acquirer places on the potential victims are higher compared to the value placed on it by its present owners. The acquisition of the firm by another yields possible increase of the firm’s market power; rationalization of surplus capacity yielding to reduced costs of combinations; attainment of economies of scale; and, synergy in cases where the sum of the two entities might be higher compared to the sum of the parts (Sherman and Sherman 2011, p.36). Foster’s Group, the biggest brewer within Australia, initially rejected the conditional, off-market, cash takeover of Australia $11.2bn (€8.3bn) acquisition approach from SABMiller representing all the issued shares in Foster’s Group Limited. The proposal to acquire the company aligned with the strategy detailing generation of a rewarding worldwide spread of businesses, and establishment of strong and effective brand portfolios. Australia manifests a strong, wealthy, and rising economy with a projected population growth accompanied by strong economic growth within Asia. Australia enjoys a profitable beer market in which Foster’s details the leading brewer with 7 of the top 10 beer brands, scale production, and a national distribution platform (Christopher 2012, p.169). The acquisition is in line with SABMiller orientation in acquiring and integrating brewing entities in a manner that benefits shareholders, business partners, employees, and the community at large. The paper explores a recent merger and takeover activity within Australia and its impact on shareholder returns and some implications to the theory of the firm as evident in the results. Theoretical Background According to the market power theory, mergers and acquisitions enhance market power of firms involved. This may be driven by adverse changes registered the economic environment such as a fall in demand relative to capacity, a rise in international competition within the domestic market, and/or legislative changes. Similarly, the firms may seek to maintain size relative to rivals customers and suppliers within the market (Firth1980, p.235). The acquisition may generate monopoly gains whereby the purchasing a rival firm might minimize competition and enhance industry profits (Faulkner, Teerikangas and Joseph 2012, p.502). On August 17, 2010, SABMiller declared its intention to take its bid for Foster’s Group Ltd directly to the company’s shareholders. On December 16, 2011, SABMiller, one of leading brewers globally with more than 200 beer brands and over 70,000 workers in more than 75 countries, acquired Carlton and United Breweries (CUB) representing the Australian beverage business of Foster’s Group Limited. The court approval of the transaction preceded the entity's shareholders meeting, whereby the deal received the green light by 99.1% of current shareholders. The completion of the transaction scheme of arrangement can be regarded as a notable success given that SABMiller’s earlier proposal (June 2011) to acquire Foster’s Group for $4.90 per share became hostile in August 2011. In the approved transaction, Foster’s Group’s ordinary shareholders gained total cash consideration of A$5.40 per share, which represented an enterprise value of about Australia $11.7billion. In addition, to completing the acquisition of the firm, SABMiller also entered into a strategic alliance with Castle in Africa. Some of the means of gaining control of a public company entail a public offer (takeover bid) detailing gaining control of a listed public company. Recommended takeover can also be undertaken by: scheme and launching a dual listed company structure (Ahlstrom and Bruton 2010, p.190). A scheme demands a proposal to be tabled by the target to its shareholder and approved by the court. Court’s approval is critical as it is binding on all shareholders. Company Background Foster’s beer portfolio encompasses Australian icons such as Crown Lager, VB, Cascade, Carlton Draught, and successful imports such as Asahi. Through its Carlton United Brewers business, Foster’s Group Ltd details Australia’s largest brewer with a control of half of the beer market. SABMiller forms one of the world’s largest brewers with considerable brewing interests and distribution agreements that span across six continents. The group’s broad portfolio encompasses global brands such as Pilsner Urquell and Grolsch, as well as leading local brands such as Castel, Miller Lite, Aquila, and Victoria Bitter. In 2011, SABMiller reported an adjusted pre-tax profit of $4,491 million and group revenue of $28,311milion. In 2012, the world’s second largest brewer reported an 11% increase in revenue to reach $31.4bn and a 12% increase in EBIT to reach US$5.6bn mirroring strong growth in Africa and Latin America. A. Strategy The acquisition of Foster by SAB Miller can be regarded as strategic as the firm seeks to benefit from synergies emanating from economies of scale and scope and a combination of best practices. With regard to economies of scale, the acquisition allows the firm to produce related additional products based on experience with existing products. Since the acquiring firm is vital, SAB Miller will be able to implement specialization. An analysis of the reasons why SABMiller decided to acquire generates a number of points. With regard to financial and research development strategy, SABMiller can be considered to have placed innovation perspective first given that Foster’s Group has considerably outpaced SABMiller in terms of innovative revenue-generating products (Sherman and Sherman 2011, p.37). Hence, SABMiller bid to acquire Fosters so as to acquire Foster’s R&D capabilities. Second, SABMiller can be considered as buying its way into the Australian beer market, which is rated the fourth in the world. This is because SABMiller did not previously have significant presence within Australian market, which Foster’s dominated. This does not factor in the projected decline (about 7%) of the market in 2011-12). The slight synergies and margin improvements from the acquisition of the Foster’s Group Ltd can justify the decision of SABMiller to acquire the firm. Nevertheless, the two firms lack geographic overlap and a Bloomberg survey conducted in 2011, prior to the acquisition, estimated that the approximate median savings owing to the synergies only amount to $150 million. Moreover, the synergies obtained would be one-sided given that margin improvements in Foster’s organization would be hard to make. This arises from the fact that Foster’s Group enjoy one of the highest EBITDA margin within the industry averaging around 38%, while SABMiller’s EBITDA margin average around 16% only. In addition, SABMiller’s bid can be perceived as embodying a defensive strategy to safeguard against entry of other competitors’ into the Australian market. Nevertheless, this may not be justified given that, to date, there have been minimal publicized interests from other competitors, even after the entity's decision to spin off its loss making wine operations. Foster’s Group product innovation strategies can be regarded as outpacing those of SABMiller. In a period of five years (2006-2010), SABMiller filed for 23 patents and made 143 product announcements. In a similar period, Foster’s Group filed for 14 patents and made about 30 product announcements. Although, SABMiller generated about 64% more patent filings compared to Foster’s and had four times as many product announcements compared to Foster’s Group, one can argue that Foster’s Group R&D departments to be equally successful at patent creation and product announcements (Needle 2010, p.290). This flows from the fact that SABMiller occupies a higher global profile compared to Foster’s, besides its revenue is approximately 8.5 times greater than Foster’s, and it employs 22 times the number of employees working at Foster’s Group. Although, the volume of patent filings and product announcements does not necessarily translate to an entity being more innovative than the other, a correlation can be established between revenue growth and product development volume (Pablo and Javidan 2004, p.4). Based on this assertion, a comparison between SABMiller’s and Foster’s compounded annual growth rate (CAGR) can be established. From year 2006 to 2010, Foster’s CAGR of adjusted revenue stood at 2.85% while that of SABMiller stood at 1.80%. Foster’s CAGR surpassed that of SABMiller by 1.05% representing an addition $44 million in EBITDA contribution within the five-year period. The CAGR variance registered between SABMiller, and Foster’s can be conceived as mirroring the company’s capability to out-innovate SABMiller in terms of product announcements and patent filings. In terms of strategy, one can conclude that SABMiller acquisition of Foster’s stems from the firm’s industry-leading margins, as well as the capability to lead in terms of innovative, patent flings and product announcements (Pablo and Javidan 2004, p.3). SABMiller’s purchase strategy for the entity can be categorized as a hybrid of adding innovation capabilities to enhance its CAGR, as well as incorporating operational capabilities to enhance its EBITDA margin, which, if successful, will enhance shareholder value. B. Regulatory Implications Public mergers and acquisition within Australia are guided by the overriding market activity and requires the regulation of recommended and hostile bids. The regulation encompasses undertaking of due diligence; procedures for announcing and launching an offer (inclusive of documentation and mandatory offers); consideration; post-bid considerations (inclusive of squeeze and de-listing procedures); tax issues; and hostile bids. The unsolicited takeover by SABMiller for Foster’s had to be subjected to the attainment of several conditions, majority of which are customary within a change of control situation (Depamphilis 2010, p.21). Takeover bids remain governed by the Corporations Act guiding Takeovers and Mergers. The acquisition of Foster’s by SABMiller had to receive the green light from Australia’s Foreign Investment Review Board (FIRB). SABMiller was required to avail certain undertakings to the Treasurer relating to its acquisition of Foster as a step within FIRB process. The approval of the transaction represented the final condition to be met prior to subjecting the offer to shareholder vote in a scheduled scheme (Kew and Stredwick 2005, p.231). The clearance by the body gave SABMiller the green light given that the deal would not threaten beer competition. C. Valuation Analysts initially anticipated that SABMiller would be required to pay up $5.20-$5.40 (Australian Dollars) per share to succeed; however, a share offer of $4.90-$5.40 (Australian Dollars) remained sufficient to clinch the deal. $5.40 per share paid share represented a premium of about 24% to $4.34, as adjusted ex-dividend five-day volume embodying a weighted average price. The agreed proposal represented an acquisition enterprise value of about A $11.5bn embodying a 2.8% increase of the enterprise value of A $11.2bn implied by SABMiller’s initial proposal announced on June 21, 2011. This was a marked increase compared to the original proposal tabled on June 20, 2011 and represented 63.25 cents per fully paid share. D. Financing of the Acquisition The offer to purchase the shares was funded via a combination of existing resources and fresh debt committed by several of financial institutions. In January 2012, SABMiller announced that its subsidiary, SABMiller Holdings had priced a $ 7,000,000 (U.S. Dollars/USD) bond issue successfully. The notes guaranteed by the company were issued in four tranches: $1.00bn of 2015 year notes bearing a coupon of 1.850%; $2.00bn of 2017 (USD) year notes bearing a coupon of 2.450%; $2.500bn of 2022 year notes bearing a coupon of 3.750%, and $1.500bn (USD) of 2042 year notes bearing a coupon of 4.950%. The net proceeds were utilized to repay, in part its outstanding borrowings incurred during the financing of the acquisition of Foster’s Group Limited in December 2011 (Reuvid 2007, p.17). E. Defence Tactics SABMiller made a hostile move to acquire Foster’s, which was initially rejected by the Australian brewer’s board. SABMiller initially approached Foster’s on June 20, 2011 with a confidential acquisition bid detailing an offer of A$4.90 per share in cash, which amounted to valuing of the entity at A$11.2bn. The proposed price of A$4.90 per share in cash represented an enterprise value for Foster’s and a forecast EV/EBITDA multiple of 12.5 times. The board of the entity intended to recommend shareholders to decline SABMiller’s proposed offer and restated its belief that the offer, at SABMiller suggested price significantly undervalued the company. The revised share offer was placed at A$5.10 per share, which represented a 4% increase of the original offer when it launched to pursue the company. The incorporation of dividends and exceptional returns increased the value of the value of the deal to A$5.53 per share (a 13% increase compared to SABMiller’s initial offer). As anticipated, SABMiller’s improved bid for Foster’s was recommended by the Australian brewer’s board. SABMiller bid enhanced its pressure on the Foster’s board by slightly increasing its initial offer (Kumar 2012, p.5). F. Implementation The acquisition was not difficult to integrate, and it is improbable that SABMiller would dispose the acquired firm. The paper has established that the acquisition heralded benefits to the SABMiller’s shareholders given that the acquisition aligned with the firm’s strategic priorities, and handed the firm with a leading position in the stable and profitable Australia beer industry. SABMiller expects Foster’s to become a critical part of its business via the application of its commercial capabilities and global scale, as well as by building on the initiatives put in place by Foster’s management (Hill and Jones 2013, p.302). The acquisition of Foster’s is anticipated to be EPS enhancing for SABMiller within the first full year of ownership, and herald economic returns that may exceed the project WACC by year 5. These results align with takeovers being highly motivated by maximization of shareholder wealth. G. Risk The directors supporting the acquisition believed that the reasons for Foster’s shareholders to vote in favour of the arrived at Transactions Resolutions surpassed the reasons to vote against them given that there was no superior proposal. The transaction in the transaction can be considered as fair and reasonable in line with the best interests of Foster’s shareholders. Conclusion The acquisition of Foster’s Group Limited by SABMiller appears to be propelled by the objective of leveraging the synergies within the acquisition process. In order to keep up with growth and changes within the globalized economy, any entity has to pursue the path of growth that contains diverse challenges and issues and overcome them to become a success story. SABMiller, through its indirectly wholly-owned Australian subsidiary (SABMiller Beverage Investments), acquisition of Foster’s can be regarded as a case mirroring a company following the path of success. References List Ahlstrom, D., & Bruton, G. D. (2010). International management: strategy and culture in the emerging world, Australia, South-Western Cengage Learning. Pp.190. Depamphilis, D. M. (2010). Mergers, acquisitions, and other restructuring activities: an integrated approach to process, tools, cases, and solutions, Burlington, MA, Elsevier/Academic Press. Pp.21. Faulkner, D., Teerikangas, S., & Joseph, R. J. (2012). The handbook of mergers and acquisitions, Oxford, Oxford University Press. Pp.502. Firth, M. (1980). Takeovers, shareholder returns, and the theory of the firm, The Quartery Journal of Economics 94 (2), pp.235-260. Christopher, E. (2012). International management: explorations across cultures. London, Kogan Page. P.169. Hill, C. W. L., & Jones, G. R. (2013). Strategic management theory, Mason, South-Western. Pp.320. Kew, J., & Stredwick, J. (2005). Business environment: managing in a strategic context, London, Chartered Inst. of Personnel and Development. Pp.231. Kumar, B. R. (2012). Mega mergers and acquisitions case studies from key industries, Basingstoke, Palgrave Macmillan. Pp.5. Needle, D. (2010). Business in context: an introduction to business and its environment, Andover, South-Western Cengage Learning. Pp.290. Pablo, A. L., & Javidan, M. (2004). Mergers and Acquisitions Creating Integrative Knowledge, Oxford, Blackwell Pub. Pp.3-5. Reuvid, J. (2007). Mergers & acquisitions a practical guide for private companies and their UK and overseas advisers, London, Kogan Page. Pp.17. Sherman, A. J., & Sherman, A. J. (2011). Mergers & acquisitions from A to Z, New York, American Management Association. Pp.36. Read More