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SABMiller’s choice: lift bid for Heineken or marry AB InBev

Companies

Tara Lachapelle

IF SABMiller wants to avoid getting bought, its best bet may be to make Heineken an offer it cannot refuse. SABMiller is looking to make a large enough acquisition that will shield it from being acquired by growth-hungry Anheuser-Busch InBev (AB InBev) , the largest brewer.

London-based SABMiller had bet that $45 billion (R495.9bn) for Heineken would be the answer, only to have its takeover offer turned down by the company’s founding family earlier this week.

Even though shares of both Carlsberg and Diageo rose on Monday on speculation they could be alternative targets for SABMiller, Heineken is still the most appealing option, according to Morningstar’s Philip Gorham.

Persuading the Dutch brewer to sell might require a bid within the upper e70 (R999) a share range – about a 30 percent premium – as well as making concessions such as giving the family board seats and adding Heineken to the combined company’s name, Gorham said.

“I suspect that as vocal as Heineken has been about not wanting to sell, everything has its price,” Gorham said. “SABMiller could come back to Heineken. It’s the number one choice. If they don’t get that, anything else is suboptimal.”

Richard Farnsworth, a spokesman for SABMiller, declined to comment on whether it would make another attempt to buy Heineken or other companies.

Vulnerable giant

Heineken confirmed in a statement that it had rejected SABMiller, saying the proposal was “non-actionable” and that the Heineken family intended to keep the company independent. The founding family controls the brewer via another publicly traded vehicle, Heineken Holding, which owns 50 percent of the 150-year-old business.

The Heineken statement “was very clear”, company spokesman John Clarke wrote on Monday.

The rejection leaves SABMiller more vulnerable to being acquired by AB InBev, the maker of Budweiser and Stella Artois. The ball is in the Belgian company’s court to move forward with the long-speculated merger – unless SABMiller can persuade Heineken’s family to sell.

“It’s just very difficult in those sorts of family circumstances where there’s more than money involved, there’s emotions,” Wyn Ellis, an analyst for Numis Securities, said. “From what Heineken said, it looks to me that the definitive answer is no.”

SABMiller had “sensible people, so I guess they would not have made the approach unless they felt there was a chance of certain success”, Ellis said.

While the price that SABMiller offered has not been made public, Heineken shares climbed 1.3 percent to e60.18 on Monday, valuing the company at almost 11 times this year’s estimated earnings before interest, tax, depreciation and amortisation (Ebitda).

SABMiller, valued at $98bn after gaining nearly 10 percent in London on Monday on talk of an AB InBev approach, could justify paying an Ebitda multiple in the “low teens” given the opportunity it would have to expand the Heineken brand in Asia, one of the faster-growing beer markets, Gorham said.

“It leaves some room to go higher” from Monday’s closing level, he said. “I wouldn’t rule out a high 70s takeout price.”

If SABMiller were to pay e78 a share for Heineken entirely in cash, it would result in a 16 percent increase to next year’s earnings, data show.

Lesser alternatives

SABMiller may have other options should Heineken continue to resist, though they also appear flawed. One was to pursue a deal with Carlsberg, the Danish brewer that was valued at $15bn on Monday after rising 2.7 percent, except it was controlled by a foundation that also might not be willing to sell, Ellis said.

Carlsberg’s brands were less appealing than Heineken’s, and its biggest developing market was eastern Europe, which was not growing as quickly as other developing regions, Gorham said.

While Heineken and AB InBev’s brands ranked among last year’s top 10 beers by volume, none of Carlsberg’s beers made the list, according to Bloomberg Intelligence.

Another idea was to buy Groupe Castel’s African beer operations, in which SABMiller already has a 20 percent stake, although that might not provide enough scale, he said.

There is also Diageo, which surged 2.2 percent on Monday, its biggest gain since April. The $76bn company focuses on liquors such as Johnnie Walker whisky and Smirnoff vodka and is unlikely to be interested in merging with SABMiller or selling its Guinness beer brand, according to Ian Shackleton and Edward Mundy from Nomura International.

“That SABMiller’s inorganic options have been so publicly lessened puts AB InBev in an even stronger position, should it choose to make a move on SABMiller,” Eddy Hargreaves, an analyst at Canaccord Genuity Group, wrote in a note on Monday. “SABMiller shareholders may be even more likely now to welcome a bid.”

Perhaps management would be, too, said Bryan Keane, a money manager at Alpine Woods Capital Investors, which owns AB InBev stock.

Being rebuffed by Heineken “may make SABMiller change their position and be more open to discussing a deal with AB InBev”, Keane said from New York. “They’re very complementary businesses.” – Bloomberg

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