BREAKFAST DEALS: Foster's face-off

Foster's boss John Pollaers gets ready to defend his decision to reject SABMiller's $9.5 billion overture and he just might have a weapon up his sleeve to dent the suitor's game plan. Meanwhile, BlueScope Steel voices a few regrets as its fellow BHP spin-off, OneSteel, continues to morph into a bona fide iron ore business and Bow Energy becomes the latest target in the CSG sector as Arrow Energy makes its intentions clear with a $520 million offer. In other news, Caltex raises the spectre of job losses as it reviews its local refinery operations. Perth-based gold explorer Adamus Resources looks to join forces with Canada's Endeavour Mining and the ACCC asks for more information on the $1.9 billion Foxtel-Austar merger.

Foster's, John Pollaers

Foster's boss John Pollaers arguably faces his sternest test today as he gets ready unveil the brewer's downbeat full-year results and, more importantly, defend his board's decision to reject SABMiller's $9.5 billion hostile bid. SAB played its cards well last week to put the onus back on Pollaers to engage with the suitor and explain to shareholders why they shouldn't look to accept SAB's offer. The word from Foster's camp is that the board is not going to lie down and accept SAB's current overture and Pollaers actually does have a potent weapon up his sleeve to mollify disgruntled shareholders. Foster's management will no doubt put a healthy spin on the brewer's outlook, telling shareholders that after shedding the poisoned chalice of the wine business the company has what it takes to ride through the subdued beer market. However, the real showstopper for Foster's could be a share buyback, utilising the $390 million bonus recently won from the Australian Taxation Office to hand back as much as one billion dollars to the shareholders. Foster's is in line to pocket a total cash benefit of more than $835 million after winning the long-running Ashwick stoush against the ATO and said in July that it would take a close look at its dividend policy and capital management options in light of the successful result. Pollaers can use this to blunt SAB's thrust, with Citi analysts reckoning a hefty capital return and a dividend boost could be on the cards. This will allow Foster's to send a clear message to SAB that if it's serious about a deal it will have to do better than $4.90 a share. The fact that SAB is serious is evidenced by the chatter that it has been buying Foster's shares on-market, so it will be up to Pollaers this morning to either convince his shareholders that they should stick with the current team or give SAB every reason to sweeten its offer.  

* Foster's has this morning announced a decision to undertake capital management of at least $500 million in fiscal 2012. The brewer has posted an 8.7 per cent fall in underlying full-year profit, thanks to the decline in the local beer market, with a net a loss for the twelve months to June 30 of $89 million. Pollaers' initial comments – and this is something he will no doubt be keen to expand – are that the long-term fundamentals of the beer market in Australia remain healthy and the business should return to the long-term trend of modest growth under the guidance of Foster's experienced new management team. So the overall message is that things are on the mend. And there's plenty of window dressing – in the form of a successful cost cutting program, a final dividend of 13.25 cents per share unfranked and capital management – that should keep the shareholders satisfied and put the ball back in SABMiller's court.

BlueScope Steel, OneSteel

BlueScope boss Paul O'Malley did what he had to do yesterday to get the steelmaker back on firmer footing but the announcement by its peer OneSteel to expand its iron ore business did force a wistful concession from O'Malley. A retrospective O'Malley told the media that in hindsight his company could have done more to follow OneSteel's lead and invest in its own iron ore and coking coal mines. BlueScope had the chance to do so since 2006 but never made the move while the game changed around them. So as BlueScope hoped to ride out the horror cycle of a higher Australian dollar, higher commodities prices and cheaper steel prices, OneSteel continues to increasingly morph into a bona fide iron ore explorer. OneSteel has paid $346 million for WPG Resources' iron ore assets, including its subsidiaries Southern Iron, Central Iron and Coober Pedy Resources. OneSteel will also spend about $200 million to nearly double the export capacity of its port facilities at Whyalla, from 6.5 million tonnes to 12 million tonnes. The transaction is expected to be completed in October 2011 and would add to earnings per share once iron ore sales start in the fourth quarter of 2012. With OneSteel's boss Geoff Plummer saying that his focus is on areas where the company can grow earnings and be competitive there's a good chance that it will have its eye out for further iron ore acquisitions.

Bow Energy, Arrow Energy  

With Santos moving to scoop up Eastern Star Gas in July it was only a matter of time before the other independent medium-sized coal seam gas explorers were going to receive offers. The target this time around is Bow Energy, with Royal Dutch Shell and PetroChina lobbing a $520 million indicative proposal through their local unit Arrow Energy. Under the proposal, Arrow would acquire all of Bow Energy for a cash consideration of $1.48 per share. Bow was carrying a target price of $1.80 a share at the start of the year but its stock has been hit by volatile markets and was trading at 88.5 cents a share before Arrow's approach. The 67 per cent premium certainly caught the market's attention, with Bow shares ending yesterday's session at $1.41. And while some have pointed out that the offer undervalues the target, the chances of squeezing a better offer from Shell and PetroChina look slim. However, Bow does have a couple of thing working in its favour. The first is that the offer is pretty slim in terms of the dollars per unit of reserves. Arrow is offering 16 cents per gigajoule of proven, probable and possible reserves. That compares poorly to the 51 cents per gigajoule Santos is paying for Eastern Star Gas. With all the major CSG producers keen to shore up their gas reserves, Bow could press for a better price or threaten to drag out the transaction. According to The Australian Financial Review, Arrow may not have the patience for a long affair given it needs to make a quick decision on whether it needs to order enough trains to cater to Bow's reserves. The paper also points out that the target has a trump card in the form of a potential Asian partner that may be willing to buy Bow's CSG acreage. The entry of an interested LNG buyer will change the game plan for Arrow, which will then have to raise its offer significantly.

Caltex  

Staying in the energy space, Caltex has raised the spectre of job losses at its refineries, with boss Julian Segal telling the market yesterday that the company was reviewing the future of its operations in Sydney and Brisbane. The two facilities account for a third of Australia's refining capacity and Segal's rationale behind the move was the same as that voiced by Royal Dutch Shell earlier this year when it closed the door on the Clyde refinery in Sydney. The bottom line is that the mega-refineries in Asia are increasingly making the local ones redundant, a trend that will only increase if the Australian dollar maintains its strength and oil prices push up.    

Adamus Resources, Endeavour Mining

The CSG sector wasn't the only hub of M&A activity yesterday, with Toronto-listed Endeavour Mining and ASX-listed gold explorer Adamus Resources announcing their plan to join forces and create a West Africa-focused mid-tier gold producer. The friendly scrip deal is worth around 69 cents a share for Adamus shareholders, who will get 0.285 Endeavour shares for one Adamus share. Under the terms of the transaction, Endeavour will invest at least $US160 million to help Adamus with the development of its Nzema Gold mine in Ghana. The investment will cover the repayment of a $US60 million project loan and at least $100 million towards a reduction of hedged gold volumes. The combined entity will be listed on the ASX and is expected to produce 250,000 ounces of gold annually by the end of 2013. The only thing now standing in the way is whether Adamus shareholders will now be willing to see Endeavour scrip as a fair trade. Adamus is using CIBC Australia as its financial advisor, with Allion Legal working as its local legal counsel and Fraser Milner Casgrain LLP acting as its legal counsel in Canada.

Wrapping up

ANZ Banking Group is reportedly poised to unveil the first major retail bank targeted hybrid issue in two and a half years with the AFR reporting that the lender is going to launch a $750 million hybrid issue to take advantage of pent-up demand for high-yielding bank securities. The transaction will be lead managed by ANZ, Macquarie and UBS. Meanwhile, Qantas shares have hit record lows as it's management get ready to fend off the assault from the unions but amid the industrial furore the Australian Competition and Consumer Commission has at least approved the airline's alliance with American Airlines. Speaking of the ACCC, the competition regulator has asked for more information from Foxtel and Austar United with regards to their proposed $1.9 billion takeover. Both will be more than happy to provide the ACCC with whatever it needs but the extra documentation could delay the regulator's final decision on the merger from September to October.