How To Play A Potential Anheuser-Busch InBev And SABMiller Merger

Includes: BUD, SBMRY
by: The Outsider


There has been over the years significant speculation that AB InBev may buy SABMiller.

AB InBev has a long history of mergers, and alternatives to a large merger with SABMiller are scarce.

AB InBev may successfully bid for its rival, but a premium price will certainly be required, thus the best way to play this potential merger is to buy SABMiller’s shares.

Anheuser-Busch InBev (NYSE:BUD), usually known as AB InBev, is a Belgian-Brazilian multinational beverage and brewing company, headquartered in Belgium. It is the world's largest brewer, with a global market share of 25%. It has a portfolio of about 200 brands, including well-known brands Budweiser, Stella Artois and Corona. Its total revenue for all 200 brands in 2013 was over $43 billion. The company trades in the U.S. under its American Depository Receipts on the New York Stock Exchange, and has a market capitalization of about $178 billion.

AB InBev's growth over the years has been mainly through several mergers & acquisitions, including the mega deal between Anheuser-Busch and InBev in 2008. AB InBev's current stance on merger & acquisitions is that acquisitions are the preferred use for cash ahead of special dividends or share buybacks. The company targets beer as the preferred product, since it is the company's expertise. AB InBev has a cost-cutting reputation post-deal, so its targets are mainly peers where existing management has allowed inefficiencies to surface.

Historically, AB InBev has completed acquisitions when its organic growth starts to slow. Given that AB InBev has reported slower growth over the past few quarters, this has motivated some rumors that AB InBev may buy its largest peer SABMiller (OTCPK:SBMRY) to boost its growth prospects, including from financial experts Canaccord that "sees the possibility of a possible merger with Belgian-Brazilian drinks giant Anheuser-Busch InBev. The broker has hiked its target price for SABMiller's shares from 3,000p to 3,800p, but said it sees a 25% possibility of a bid from ABI at 4,200p a share within the next two years." This speculation has already had some effect as "SABMiller's market capitalisation tipped a trillion rand yesterday on the back of renewed speculation that the world's biggest brewer, AB InBev may make a bid for it." Speculation was already brewing when the Financial Times, Britain's equivalent of the Wall Street Journal, has dedicated a news piece a few days ago about this potential deal stating that "taking over the UK group would allow AB InBev to inject SABMiller's fast-growing markets - especially in Africa where AB InBev has virtually no presence - into its portfolio." This would clearly boost AB InBev's growth outlook over the long term, changing significantly the company's profile.

The lack of big targets within the beer industry makes SABMiller a perfect fit for industry leader. This is not the first time that AB InBev has considered a purchase of SABMiller and this move has been expected within the industry over the past few years. In 2011, SABMiller responded to the danger of a bid by buying Foster's brewing business in Australia for about $11.5 billion. This seems to have only delayed for a couple of years a potential takeover offer, but SABMiller's management may try something similar again to stay independent. Other competitors in the industry include Heineken (OTCQX:HEINY) and Carlsberg (OTCPK:CABGY), and SABMiller may try to buy one of these companies to stay independent.

To be successful on a potential takeover approach, AB InBev obviously needs the support of SABMiller's shareholders. Altria (NYSE:MO) is the largest shareholder with an equity stake of 26.8%, and a significant part of its own distributions are financed from dividends received by its stake in SABMiller. Its second-largest shareholder is Bevco with a 14% stake. With the two major shareholders owning 41% of SABMiller, getting their agreement to a deal will be a great milestone for AB InBev to successfully acquire its rival.

Both Altria and Bevco sold businesses to SABMiller in the past to diversify risk, and taking a stake in a new company would likely be attractive and a way to avoid taxes from capital gains. Thus, if AB InBev pays a high premium that reflects some of the synergies it could extract from a merger, most likely Alcoa and Bevco would support a deal.

Although AB InBev is present throughout the world and has a balanced exposure to developed and developing markets, it is not present in Africa. On the other hand, SABMiller's roots are in South Africa, and Africa represents a large part of its revenues and profits. Therefore, buying SABMiller would bring complementary geographic exposure and re-weight AB InBev's business in favor of higher-growth emerging markets. An acquisition of SABMiller would give AB InBev about $7 billion in annual sales in Africa and $4 billion in Asia, helping to reduce its current reliance on the Americas and Brazil and increasing its exposure to higher-growth markets.

AB InBev and SABMiller are the two largest beer companies in the world, so a merger between the two will most likely be subject to a lot of anti-trust issues, especially in developed markets. When AB InBev bought the Mexican brewer Grupo Modelo it had to sell its Modelo's U.S. business to satisfy U.S. anti-trust demands. If AB InBev merges with SABMiller it will much likely be required to sell a large part of the acquired assets in the U.S., Europe and Latin America. However, there isn't any geographic overlap in Africa so the acquisition still makes sense.

Anheuser-Busch has a long history of growing through acquisitions and its large size makes big acquisitions necessary to have a significant impact. Therefore, there aren't many targets within the brewing industry that can change significantly Anheuser-Busch's profile, even though it may have other alternative targets within the broader beverage industry, such as Diageo (NYSE:DEO) or PepsiCo (NYSE:PEP). However, Diageo has a similar size compared to SABMiller, but its beer business represents only about 20% of its sales. Anheuser-Busch does not have experience of running a spirits business, so cost synergies would necessarily be lower and the integration risk higher. Regarding PepsiCo, it would require a partner to take the snack business, reducing its growth outlook as Anheuser-Busch would be saddled with the inferior Pepsi portfolio with challenging market fundamentals.

If AB InBev decides to go ahead and bid for SABMiller, it should finance a large part of the deal with debt but an equity issue is also likely. Even though AB InBev's balance sheet is relatively strong, the deal would be too large to be all-debt funded given that its net debt-to-EBITDA ratio would rise to more than 6x. This would certainly lead to credit rating downgrades and therefore an equity issue is also required. This will dilute existing shareholders and lead to lower earnings in the short term. Thus, the best way to benefit from this potential deal is as a shareholder in SABMiller, given that AB InBev should pay a premium to acquire its rival. Looking for past deals the average premium paid has been around 30%, but SABMiller's shares have performed well over the past few months, thus a premium of 10-20% above the current price should be enough for AB InBev to buy SABMiller.

Disclosure: The author is long MO. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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