It's that time of year again when stock market analysts are convinced that some kind of merger is brewing (feel free to stop reading me for use of that pun) between Anheuser-Busch (NYSE:BUD) and SABMiller (OTCPK:SBMRY). I've never considered it much of a serious possibility because the whole point of antitrust regulation is that you look askance when the #1 and #2 players in an industry merge, and it can be exceptionally difficult to pull off. At a minimum, I would bet SABMiller would be forced to put a third of its business on the auction block or be set for private divestment/spinoffs, but we shall see.
Of course, you are free to wonder whether anti-trust regulations should even exist in industries that are entirely consumer discretionary. If the price increases were too high, you'd simply stop drinking Stella or Budweiser and enter the wild world of wine connoisseury (that's the first word I ever created. After putting up with that pun earlier, I figured it only fair I expand the dictionary to make the universe right). If enough people agreed with you and sales declined, the price would come so Anheuser-Busch could maximize its profits on behalf of shareholders. This isn't a situation like water or electric consumption where you're a captive consumer dealing with a necessity for life product.
The other reason why the merger would not go through has to do with valuation. There is a reason why Inbev swooped in to buy Anheuser-Busch in the summer of 2008. The U.S. dollar was getting weak compared to Belgium's European purchasing power, and the price of Anheuser-Busch was dipping below $50 per share before Inbev swooped in and made their bid. Inbev could not have bought out Anheuser-Busch in 2014 business conditions.
In the case of SABMiller, it trades at even more of a premium than Anheuser-Busch did. Depending on how you take into account what the company considers nonrecurring items, SABMiller is trading between 25 and 30x profits. You need perpetual 9-10% or greater growth for the lifetime of your holding to make something like that work out. If Anheuser-Busch were to acquire it, it is entirely possible they would have to pay 35-40x earnings and take on over $60 billion in debt to pull it off.
Anheuser-Busch Inbev, meanwhile, is still dealing with the massive debt undertaking from the Anheuser-Busch merger. It has $49.1 billion in debt on its books. After adding SABMiller, the company would cross the $100 billion debt threshold. Of course it's not a bankruptcy risk; the high quality of the company could service the debt, but it would put a drag on earnings. It would be the beer version of AT&T, where you have this very high-quality asset burdened with very significant debt (although the valuation of AT&T almost always lets you get a 5% dividend yield or better at the time of purchase, so it tends to work out very well over time. The Anheuser-Busch yield, meanwhile, would be about a third of that).
If a merger did happen, my guess is that the stock's earnings per share growth rate would get permanently anchored around the 6% to 7.5% mark. You'd see beer price increases that slightly outpace inflation, maybe a little bit of volume growth, and very minor acquisitions here and there, but the sheer scope and debt load of the company would make something like perpetual 9-11% growth fall out of the zone of reasonable probabilities.
The beer industry isn't growing that much, and $100 billion is something to reckon with. And there's the fact that it is very hard to buy a mature asset at 35-40x earnings and do that mythical "create value" thing that so many executives talk about. If a merger did occur with the understanding that SABMiller had to shed significant assets, you'd probably see an immediate price jump in the price of Anheuser-Busch stock over the first couple of years as the earnings per share growth got baked into Anheuser-Busch Inbev's figure, but after that, the gravitational pulls of the debt load and the too-big-to-grow business model would put the company on the perpetual 6% to 7.5% earnings growth path.
*Note*: Be sure to do your own research before drawing conclusions. This is always true, but especially so here. My predictions for Anheuser-Busch are significantly more pessimistic than what most Wall Street analysts predict. There, it is quite common to find expectancies that Anheuser-Busch will grow 10% to 12% annually on Wall Street. Usually, they cite South American growth and the expansion for the "Rita" brands with Bud Light. I contend that those growth expectations are too optimistic, and the debt load is not adequately accounted for in their analysis. As always, happy investing.
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