London and New York - Slowing growth at Anheuser-Busch InBev (AB InBev) and a dearth of big takeover targets may drive the world’s biggest brewer to swallow its $79 billion (R848bn) rival, SABMiller.
AB InBev, which makes Budweiser and Stella Artois, has boosted revenue more than fivefold in the past 10 years with $91bn of acquisitions, but growth is forecast to slow over the next decade, according to analysts’ estimates.
Tapping into SABMiller’s presence in expanding regions such as Africa would get that growth flowing again, shareholders Alpine Woods Capital Investors and Henderson Global Investors said.
The SABMiller chief executive, Alan Clark, told Bloomberg in January that the case could be made for a tie-up, although it would be likely to require divesting some US operations to appease regulators.
Sanford C Bernstein, which has dubbed a combination of AB InBev and SABMiller “MegaBrew”, estimates it would have almost half the global beer profit pool. The deal would increase earnings at AB InBev immediately if it paid a 30 percent premium for SABMiller in cash, Bloomberg data show. Cost cuts could drive profit even higher.
“It’s
such an obvious next – and indeed last – big move by the very acquisitive AB InBev,” said Matthew Beesley, head of global equities at Henderson Global Investors. “There’s also clearly some strategic rationale to the deal, neatly filling all the geographic holes AB InBev talks of wanting to fill.”
A representative for Belgium-based AB InBev declined to comment on whether the company was interested in pursuing a deal with SABMiller.
“You could get the numbers to work,” Clark told Bloomberg in an interview in January. “There would be value loss and value destruction because they’d know that they’d have to sell the US, though.”
He declined to say whether there had been any discussions or how likely such a deal might be. Richard Farnsworth, a spokesman for London-based SABMiller, also declined to comment.
Both brewers were built through acquisitions. InBev bought Anheuser-Busch in 2008 for about $61bn including net debt, the largest deal in beer history. SABMiller has acquired almost 50 companies in the past decade, including Foster’s Group for about $13bn in 2011.
AB InBev’s market value at the end of last week was the equivalent of $169bn, and SABMiller’s was about half that.
In 2013, AB InBev earned about 80 percent of its normalised earnings before interest, tax, depreciation and amortisation (Ebitda) from the US, Canada, Brazil and Mexico, the company said last week.
Like competitor MillerCoors, the US joint venture between SABMiller and Molson Coors Brewing, AB InBev has been battling sluggish sales of mainstream brands in the US amid economic pressures and a shift in consumer preferences toward craft beers, spirits and wine.
AB InBev’s compound annual sales growth rate in the past 10 years was about 18 percent. Analysts estimate it will slow to about 4 percent over the next 10 years.
An acquisition of SABMiller would give AB InBev more than $7bn of revenue in Africa and almost $4bn of sales in Asia, reducing its dependence on the Americas and Brazil. With Latin America representing SABMiller’s biggest market, a deal would also broaden its presence in countries such as Colombia, Ecuador and Peru. Its Latin American brands include Cristal and Aguila.
“SABMiller has a lot of emerging market assets, and in particular, in areas where AB InBev doesn’t necessarily have too much influence,” Bryan Keane, a money manager at Alpine Woods, said in a phone interview. “Right now, AB InBev does not have a lot of business in Africa and SABMiller is a large player there. That’s one of the areas where beer consumption is growing, and it would allow AB InBev to further diversify.”
While AB InBev and SABMiller operate in largely separate markets, antitrust authorities probably would require SABMiller to sell its stake in MillerCoors and possibly its stake in a Chinese joint venture, said Jonathan Fyfe, an analyst at Mirabaud in London.
SABMiller also had sales agreements globally that might have to be renegotiated, such as its joint venture with Groupe Castel in Africa, Fyfe said. “It’d be an incredible undertaking.”
Even so, investors have cheered a potential merger in the past. A report by Brazilian news website IG in October 2011 that said the two companies were in deal talks triggered the biggest gain in SABMiller shares in three years.
SABMiller’s stock price has been weighed down this year, falling 5.6 percent through last week, amid concern that growth in developing markets would not be as strong as expected, and headwinds from currencies including the rand and Colombian peso.
Any offer to create “MegaBrew” now could reach about $120bn, including SABMiller’s $16bn of net debt, said Trevor Stirling, an analyst at Sanford C Bernstein.
That translates to about a 30 percent premium to its stock price last week.
At that price, earnings a share could climb by about 3 percent this year and 9 percent in 2015. Even at a 50 percent premium, a deal now would boost earnings in 2015, the data show. That’s without assuming potential synergies.
“Whereas a deal has been strategically sensible, for a while, it’s been financially impossible,” Beesley said.
“We are now in the financially possible zone, although maybe not quite yet the financially optimal zone.”
Stirling said AB InBev could probably strip out costs and improve profitability after the transaction closed, though there was less “low-hanging fruit” than in previous deals such as Anheuser-Busch.
Given the size of the transaction, it would be “a stretch, and massively complex”, though still feasible, he said.
AB InBev already has $39bn of net debt, which is 2.3 times its trailing 12-month Ebitda. Felipe Dutra, the chief financial officer, said last week that after it had paid down debt and reduced its leverage ratio to 2, “you should expect us to be combining a dividend and buyback to keep capital structure around the optimum level, provided there is no merger and acquition, which we can never predict.”
Acquisitions remained “a core competency, and we will always be ready to look at opportunities when and if they arise,” Dutra said.
Keane said while a deal might not happen soon, it was possible in three to five years as brewers looked for ways to continue growing. – Bloomberg