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Foster's $521 million payout squeezes bidder SABMiller

By Victoria Thieberger and Sonali Paul

MELBOURNE (Reuters) - Australian brewer Foster's Group put pressure on SABMiller to raise its $10 billion hostile takeover offer on Tuesday, unveiling a A$500 million ($521 million) capital return to shareholders.

The country's largest brewer proposed to return money via a share buyback or capital reduction in an effort to get SABMiller to increase its A$4.90 a share cash offer, which Foster's has twice rejected as too low.

The defensive move came as Foster's reported a slide in annual profits, beer margins falling for the first time in a decade and beer volumes under pressure, with analysts saying SABMiller needs only to offer a little more to succeed.

"It is probably one of the few options that they have, so it's not unexpected that they're doing that," said Theo Maas, a portfolio manager at Arnhem Investment Management which does not own Foster's shares.

"But I'm not sure if in the bigger scheme of things it'll make any difference," added Maas, saying that he struggles to see a materially higher bid emerging for Foster's.

The market appeared to agree, with shares in Foster's showing a muted response, rising 1.8 percent to close at A$4.99, lagging a 2.2 percent gain in the broader market <.AXJO>. SABMiller shares were up 1.1 percent at 20.67 pounds by 5:44 a.m. EDT in a firmer London market.

SABMiller declined to comment on the results or the capital return, but analysts in London said after such underwhelming results SABMiller may only have to raise its bid to around A$5.10 a share to win over Foster's shareholders.

"If this was a defense document, then it was distinctly lackluster," said one London-based analyst.

Foster's, the maker of Victoria Bitter, Carlton Draught and Pure Blonde, reported a 9 percent slide in second-half profit, a rare decline that reflected a depressed beer market and potentially weakened its defense against SABMiller.

Its market share shrank with its profit margins, which were squeezed by a price war between Australia's top supermarkets. Weak consumer spending, a shift away from beer drinking and a wet summer that knocked demand also weighed on earnings.

Chief Executive John Pollaers put on a brave face, saying the company was about half way through a three-year turnaround, with cashflows improving and cost cuts being reinvested to promote its brands.

"The turnaround of this company is clearly on track. Market share has stabilized, correcting a long-term period of decline," Pollaers told reporters.

"The key point is that we're getting on with business as usual. We are running Foster's for the long term."

Pollaers, the sixth chief of the beer group in seven years, made no mention of the SABMiller hostile bid.

"We're as well placed as anyone, and I would almost go as far as saying better positioned than anyone, to manage the interests of our shareholders," he said.

SABMiller, which makes Peroni, Grolsch and Miller Lite, has long been seen as the favorite to take over Foster's given the lack of potential rivals and the London-based brewer's desire to have a good spread of global businesses.

SABMiller, the world's second largest brewer, took its offer direct to shareholders last week after the Foster's board rejected its initial approach as shareholders hope for an offer above A$5 a share.

"Given the strong rejection by the board, the ball's in SAB's court to put their best offer forward," said Marcus Fanning, head of Australian equities at Colonial First State's growth fund.

Colonial is the No.2 shareholder in Foster's, with its funds owning 4.8 percent, according to Thomson Reuters data. Top shareholder, Capital Group, with a 7.1 percent stake, has declined to comment.

EARNINGS FALL

In the second half, Foster's earnings before interest and tax fell to A$378.9 million from A$416.5 million a year ago.

For the full year, net profit before one-off items fell 8.7 percent to A$494.9 million. After a loss on the recent demerger of Foster's wine business, Treasury Wine Estates , the bottom line sank to a loss of A$89 million.

Four analysts on average had expected a net profit before one-off items of A$496 million.

Foster's said across the industry, beer volume declined 7.3 percent in the first half and 4.6 percent in the second half, mainly because of the subdued consumer. Floods and cyclones in the eastern states over the summer also hit demand.

That rate of decline appeared to be abating, Foster's said, with volumes down only 3 percent in July.

"If we went back to normal long-term weather conditions and consumer confidence recovers, we think that the beer category will go back to flat to modest growth," Chief Financial Officer Stephen Matthews told reporters.

Foster's announced a second-half dividend of 13.25 cents a share, which SABMiller says when paid will be deducted from its offer.

The cash deal values Foster's at A$9.5 billion ($10 billion), or A$4.90 a share. Taking debt into account the enterprise value of the bid is A$11.2 billion ($11.7 billion).

The Foster's business SABMiller is bidding for holds about half of Australia's beer market and little else, having retreated home from the global beer empire it once held and having split off its wine business earlier this year.

The Foster's brand belongs to Heineken in Europe, is licensed to SABMiller in the United States, and is either owned separately or brewed under license in all main markets outside Australia.

($1=0.959 Australian Dollars)

(Additional reporting by David Jones in London: Editing by Lincoln Feast, Mark Bendeich, Vinu Pilakkott and Mike Nesbit)

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