Will risks outweigh the benefits of Megabrew?
As the talks between AB-InBev and SABMiller drag on, more and more critical voices can be heard via an all too willing international media, arguing that the
drawbacks in this transaction would counter the advantages.
For one, buying SABMiller, which has operations in around 80 countries, will be a much more complex transaction for AB-InBev than its previous two deals – its 2008 acquisition of U.S. brewer Anheuser-Busch and its 2013 takeover of Mexican brewer Grupo Modelo.
For another, the assumed high price AB-InBev will have to pay for SABMiller could lead to value destruction. The RBC analyst James Edwardes was quoted as saying that an offer for SABMiller of GBP 42 a share (totaling about USD 103 billion) or higher would bring the deal into the “realms of value destruction”.
Another issue is how the deal can be structured. SABMiller’s two major shareholders face potential capital gains taxes, so may want to get paid in shares, which would conflict with AB-InBev’s controlling shareholders’ desire to limit the dilution to their control that would come with issuing new shares, Reuters said.
Cigarette maker Altria and the Santo Domingo family of Colombia together own about 42 percent of SABMiller, and are widely believed to prefer shares in an enlarged company rather than cash in order to avoid having to pay capital gains taxes on the proceeds of their stakes, worth about USD 24 billion and USD 13 billion, respectively, at current prices.
Not enough, AB-InBev will also have to navigate a variety of likely antitrust concerns in jurisdictions such as the U.S. and China.
As to synergies from the deal, they could be small compared to AB-InBev’s past transactions. AB-InBev has a reputation for wringing costs out of the businesses it acquires. However, SABMiller is widely seen as an efficiently run business.
Then there is the issue of scale to contend with. SABMiller’s dominant position in Africa – where it operates on its own or through partnership in 37 countries – is regarded as the main reason for AB-InBev’s interest in the company, but some analysts argue that operating on the continent would present new challenges for AB-InBev.
On the whole, margins in Africa, except perhaps for South Africa, are lower than what AB-InBev is used to. Moreover, the structural costs in Africa are higher. AB-InBev will need to run breweries in each country, often producing a few million hl beer only. This does not fit with AB-InBev’s business model, which is about scale and efficiency.
Some analysts have suggested that AB-InBev could sell SABMiller’s sub-Saharan business, which would reduce the complexity of a deal but would equally significantly reduce the combined company’s prospects for growth.
Unclear is also the future of SABMiller’s recent strategy swing towards soft drinks. If soft drinks were to take a back seat in the combined company this would amount to a major strategy change. Soft drinks make up 22 percent of SABMiller’s total sales by volume, while AB-InBev gets 10 percent from its sales by volume from the non-beer category, including soft drinks and cider.
Lastly, and perhaps most fundamentally, the two companies differ culturally when it comes to control. While SABMiller does not mind to be the junior partner in certain businesses, AB-InBev likes to be in charge. It was reported that roughly 30 percent of SABMiller’s earnings last year came from entities it doesn’t control (its joint venture in China plus its stakes in Anadolu Efes and Castel). By comparison, AB-InBev’s share of such income was just 0.1 percent.
In sum, most analysts still think that a deal will be clinched. However, reservations remain. “In a transformational deal you would expect some sort of give-and-take on the overall strategy, but this would be more than a give-and-take, it would be a fundamental overhaul,” one analyst said.
