Foster's Group on Tuesday rejected a $9.5-billion Australian ($10.1-billion U.S.) cash takeover offer from global giant SABMiller as too low, but investors were betting Australia's largest brewer would succumb to a slightly higher offer.
Foster's, one of the last big prizes in a consolidating global beer market, has high margins and a 50 per cent market share in Australia, where it brews the Victoria Bitter and Pure Blonde brands.
World brewers, juggling rising raw materials prices and slowing growth in mature markets, are seeking growth elsewhere and a number of smaller brewers are expected to be swallowed up.
News of the bid sent Foster's shares surging 14 per cent to $5.16 Australian, a nine-month high and above SABMiller's offer price of $4.90 per share.
SABMiller, which makes Peroni, Grolsch and Miller Lite, has long been seen as the favourite to take over Foster's, since rivals such as Heineken are struggling with debt piles or lack adequate funding.
"This is probably round one. (SAB) is a big global player and this is a very good margin business versus its peers," said Jason Beddow, chief executive at ARGO Investments, which holds Foster's shares.
Foster's has been the subject of takeover talk since it announced plans last year to spin off its struggling wine operations, which bore nearly $3-billion in writedowns in recent years after a string of poor takeovers.
The approach by SABMiller, which came by letter, according to a source familiar with the situation, was swiftly rejected.
"The board of Foster's believes that the proposal significantly undervalues the company in the context of a change of control and, as such, it does not intend to take any further action in relation to it," the company said in a statement.
The offer was at a premium of 8.2 per cent to Monday's close.
SABMiller is likely to argue its offer is justified as Foster's already has a takeover premium built into its share price and a rival offer was unlikely to emerge, a source familiar with the deal said.
The source said SABMiller expected to hold further talks with Foster's to try and negotiate a deal but would initially focus on explaining the reasons for its bid to its shareholders.
SABMiller confirmed in a statement from Sydney on Tuesday that it had made a non-binding, conditional offer.
In a video interview on the firm's web site, SABMiller CEO Graham Mackay said the company could improve the underperforming Foster's business, which operated in a "stable, profitable" market.
"Through the application of our commercial capabilities and best operating practices we believe we can improve Foster's top line growth and enhance its profitability," he said.
SABMiller already owns the Foster's brand in India and the U.S. brewing rights.
Among other potential bidders, Japan's Asahi Breweries has shown interest in the past, according to sources, but said in February it was not planning to buy any part of Foster's. China's Tsingtao Brewery Co. said in May it was not involved in bidding.
Speculation about a joint bid by Grupo Modelo SAB de CV and Molson Coors Brewing Co. earlier this month faded due to complexities in such a deal.
Foster's beer operations and the spun-off wine business, Treasury Wine Estates , were listed separately on the stock exchange last month.
Investors said the split made the businesses more attractive to potential suitors by separating the struggling wine business, which had been seen as a poison pill.
Foster's chief executive John Pollaers, a former navy weapons engineer, has headed the brewing group since April 2010. Mr. Pollaers, the company's sixth beer chief in seven years, has said he is confident about the company's growth prospects and was keen to grow market share, which has fallen to around 50 per cent.
Foster's is seen as an attractive asset for its high margins and dominant position in Australia, although beer volumes have sagged recently with a poor summer and consumer downturn.
UBS analysts say Foster's margins for beer are about 37 per cent, nearly double global peers.
Foster's shares, which have spiked with regularity over the past year each time takeover rumours surfaced, topped the most-actives list in their biggest one-day jump since 1986.
At 0530 GMT, Foster's shares were up 13.25 per cent at A$5.13, while the broader Australian market rose 1.25 per cent.
Foster's competes in a duopoly with Kirin-owned Lion Nathan, which has around 40 per cent share, with the remainder of the market made up by small craft beers.