Australian brewer Foster's Group sought to put pressure on SABMiller to up its $10 billion hostile takeover offer, unveiling on Tuesday a A$500 million ($521 million) capital return even as profits slid.

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

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.

The market appeared to agree, with shares in Foster's showing a muted response to the news, rising 1.8 percent to A$4.99, lagging a 2.2 percent gain in the broader market <.AXJO>.

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.

Foster's suffered as its market share outside pubs shrank along with its profit margins, which were also squeezed by a price war between its biggest customers, 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 offer.

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 that rivals such as Heineken are struggling with debt or lack adequate funding.

SABMiller declined to comment on Foster's plan to return at least A$500 million to shareholders.

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.

SABMiller took its offer direct to shareholders last week after the Foster's board rejected its approach as significantly under-valuing the company.

Shareholders are hoping for an offer above A$5 a share on the view that a suitor's first bid rarely is the best offer.

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.

SABMiller has raised $12.5 billion in bid finance, giving it room to hike the offer as high as A$6.12 a share.

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.

The current offer values Foster's at 12.5 times forecast earnings before interest, tax, depreciation and amortization.

That is around the global average for recent deals, but below other mature-market beer deals such as when Kirin <2503.T> bought Australian brewer Lion Nathan in 2009 for 13.1 times and InBev bought Anheuser-Busch for 13.8 times in 2008.

Looking at multiples, based on forecasts for next year's numbers, they're up there in terms of the range that has been paid historically. So I struggle to see a materially higher bid than this, said Maas from Arnhem.

(Editing by Lincoln Feast, Mark Bendeich and Vinu Pilakkott)

Australia