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Creating MegaBrew

A merge of giants, but not of equals
Alan Clark, chief executive officer of SABMiller Plc

If the proposed acquisition of SABMiller by rival Anheuser-Busch InBev (ABI) were to go ahead, it would dwarf the biggest company currently listed on the JSE – British American Tobacco – which has a market capitalisation of R1.4 trillion.

The combination of SABMiller, the world’s second largest brewer by revenue, and ABI, the world’s largest brewer, would result in ‘MegaBrew’, a company with a market capitalisation of about $246.3 billion ($171 billion for ABI + $75.3 for SAB), which would collectively control a third of the world’s beer sales.

Whether the company would remain listed on the JSE is of course dependent on the structure of the deal, but with less than 20% of the shares listed in SA, it seems highly unlikely.

Speculation that ABI would make a play for its much smaller rival has been rife, reaching fever pitch in 2014. In September of that year SABMiller made an abortive play for Heineken, one of the few global family owned brewers remaining (along with Denmark’s Carlsberg). While critics said that Heineken’s rejection of SABMiller was a personal humiliation for CEO Alan Clark, others suggested it was the only defensive move available – in the face of a circling ABI.

Since then SABMiller’s share has under-performed in the face of slower growth and foreign currency headwinds, moving from £36.61 twelve months ago, to £29.33 on September 14, ahead of news of the possible deal.

Assuming ABI wins the support of SAB management and shareholders, there is nothing stopping the two companies from doing the deal, says Trevor Stirling, London-based beverage analyst with Sanford C. Bernstein. “There are regulatory hurdles that would need to be scaled; in particular, the US Department of Justice would almost certainly insist on the disposal of SAB’s stake in its Miller Coors JV in the USA. And it may also have to dispose of SAB’s 49% stake CR Snow in China.” Snow is the world’s biggest selling beer by volume, but arguably the least profitable.

Aside from the US and China, there are remarkably few areas of serious overlap. With ABI owning brands like Budweiser, Corona, Stella Artois, Beck’s, and Bud Light the deal is unlikely to set off any regulatory alarm bells in South Africa, Africa, Australia or India.

A deal may however affect some of SAB’s strategic partnerships – notably with French drinks company Castel, which has a big share of the beer market in Africa, and with CRE (parent of Snow). SAB also has partnerships with Turkish brewer Efes and the Coca-Cola Company.

Assuming Africa is the last relatively untapped beer market, the Castel partnership is strategic to SAB – though small in the scale of the merged entity. Together Castel and SAB – which have cross shareholdings in each others company’s – dominate Africa’s beer markets, holding the top positions in 32 of 55 African countries.

While the deal seems to work well geographically, cultural and strategic differences could prove challenging to work through, says Terence Craig, CIO Element Investment Managers. “Take for instance the fact that SAB believes beer is local and thus pushes local brands in each country, while ABI believes in global brands such as Bud.”

There will be no doubt as to who is running the show, however. While the combined entity will be enormous, it is very clear that this will not be a merge of equals, so much as a take-over.

 

Most recent FY results Total beer vol Total non beer vol Revenue Ebitda Cash flow from operations
           
ABI 408m hls 47m hls $47.1bn $18.5bn $14bn
SAB 246m hls 70m hls $27.0bn $ 6.9bn $3.2bn

ABI has always maintained that scale drives its incredible operating leverage – and the numbers seem to prove it: Its ebitda is more than 30% larger than its four competitors combined.

Screen Shot 2015-09-16 at 5.58.49 PM

 

No details have been released on the terms of a possible deal, but there is plenty of modelling going on. “It would seem to us that the offer would have to be set at least a 30% premium to the undisturbed share price, which is north of £39,” Stirling says.

Similarly, there is no indication of a possible structure. “It is likely that Altria (27% owner of SAB) would for tax reasons prefer shares for its stake, and possibly the Santo Domingo family as well (13% stake),” says Stirling. Because UK takeover panel rules insist on shareholders being treated equally, any proposal offer would have to be a mix and match of cash and shares, or a full paper offer with a buy-back after.

The key deal criterion for ABI will be when will the deal hit its cost of capital. Sanford Bernstein analysis suggests it will take a full seven to nine years, and not the usual three the brewer has come to expect. “If one assumes a £39 offer price and synergies worth 7.5% of SABMiller’s sales, the deal ROIC hits an 8% WACC in Year 7 and a 9% WACC in Year 9. This is well beyond ABI’s normal expectation of hitting WACC in Year 3,” Stirling says.

But ABI may view that this is the last big deal in beer and hence be willing to relax its normal acquisition criteria.

From a debt perspective the deal also looks doable, he says. “Assuming all cash and disposal of MillerCoors and Snow, leverage would rise to 5.9x EBITDA (though again a paper component would reduce this leverage).”

If the deal goes ahead, it would be a fitting end to two decades of beer deals that began, for ABI with the merge of the Flemish brewers of Stella Artois with Belgian brewer Piedboeuf. In 2004, Interbrew merged with Brazilian brewer AmBev to form InBev. In 2008 InBev merged with American brewer Anheuser-Busch to form ABI.

While SAB had begun acquiring small European brewers in the 1990’s, it attracted attention with the acquisition of the US-based Miller Brewing Company in 2002. Just three years later it acquired Bavaria, South America’s second largest brewer. In 2011 SAB succeeded in its hostile takeover of Fosters in Australia.

For SAB the shoe is now firmly on the other foot. The one thing not revealed in the bland statement – announcing ABI’s intention to make an offer – is: “Does SAB Management want this deal?”

Investors will not have long to wait – regulations require ABI to table a formal offer within 28 days of its announced intention to make an offer.

 

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This deal seems to make sense in the medium to long term, the combined market cap should put them in 6th or 7th spot.

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