Rumour mill going crazy that AB-InBev will buy SABMiller
It seems that, after the persistent rumour of the past couple of weeks, the question is not “if” but “when”. Analysts confirm there is definitely “smoke” here, which in the lingo of the financial world means that “Cowboys” are facing off with a bunch of “Indians” (the former – cowboys – referring to the big investment banks).
If the deal were to go ahead, it would represent an “industry transformational transaction”, observers say. By buying the global number two brewer, AB-InBev would control over 30 percent of global beer volumes, thus widening the gap to both Heineken (currently ranked third) and Carlsberg (ranked fourth) with a combined 15 percent volume share.
As we wrote last month (“AB-InBev’s need for SABMiller mega-deal grows”), the current spate of “Big Deals” in various industries is not about synergies or cost savings but mainly about growing bigger. This would also hold true for an AB-InBev-SABMiller tie-up. Analysts have long argued that it would not produce many synergies nor would potential savings be high.
It would thus epitomise a major departure from AB-InBev’s rationale in earlier deals, which were all about buying undermanaged assets cheaply and running them better. The short-hand for such transaction is “value deal”.
The Brazilian investors in AB-InBev have a long record in doing “value deals”. Remember their original purchase of Brahma, the subsequent merger between Brahma and Antarctica in Brazil to form AmBev, the InBev deal in 2004, the Anheuser Busch deal in 2008 and the Modelo deal in 2013 – they all aimed at extracting higher profits quickly. SABMiller do not meet this criterion, in our view, as they have a strong operating culture and profits per hl in many of SABMiller’s markets are already high.
Of course, there would still be plenty of goodies for AB-InBev in such a deal. Given that they are all near-monopolies, SABMiller’s Latin American markets, especially Colombia, would fit very well as would South Africa.
Although AB-InBev refrained from buying Foster’s beer business CUB in Australia (as it was overpriced), once they own SABMiller they could improve CUB’s bottom line by taking the Corona franchise away again from CUB’s competitor Lion in order to push the brand themselves.
From what we at BRAUWELT International have heard, AB-InBev are trying to raise USD 60 billion in cash to finance the transaction. This indicates to us that SABMiller could be valued at about USD 120 billion or at a 30 percent premium to its current market capitalisation of USD 94 billion. That AB-InBev will only get SABMiller at an attractive premium is beyond doubt. SABMiller’s shareholders are not desperate to sell, much like Anheuser-Busch’s shareholders and Modelo’s. The premium could go higher (perhaps up to 50 percent, as some analysts say) depending on how well SABMiller play their cards.
Another way to arrive at the transaction value of roundabout USD 120 billion is to take SABMiller’s 2014 profit (EBITDA) and multiply it by 15 or 16. That seems to be the going rate for lucrative brewing companies these days. Readers will recall that last year AB-InBev paid a multiple of 15.4 times profit for Modelo.
The reason we think that AB-InBev are only raising USD 60 billion is that the deal will not be an all-cash transaction. We have always assumed that SABMiller’s two major shareholders, the cigarette company Altria and the Colombian Santo Domingo family, which sold the Colombian brewer Bavaria to SABMiller in 2006, would not want to exchange their stakes in SABMiller for cash. Together they control 41 percent in SABMiller.
We believe they would be more than willing to take a stake in “MegaBrew”, as the combined AB-InBev-SABMiller has been dubbed by the financial markets. Just think: Why would they want to sell out now? What would they be doing with all those billions in cash? Right: They would have to find another profitable investment. In our times and age, which investment appears more secure and profitable than MegaBrew? In the case of Altria, we understand that, if Altria were to sell its stake for cash, it could trigger a large capital gains tax liability in the United States. That would make a share deal more attractive for Altria.
As far as we can see, the deal will face very few anti-trust issues. There are only two roadblocks, namely the stakes of SABMiller in the U.S. and China. In the U.S., with a combined 80 percent market share, we would expect MegaBrew to have to divest the 58 percent stake in MillerCoors to Molson Coors. Same in China. SABMiller’s joint venture China Snow is number one and AB-InBev are number three. We don’t think that the Chinese anti-trust authorities will want Megabrew to have a stake in the Chinese beer market in excess of 30 percent. That’s why we anticipate that the group will have to sell its 49 percent stake in CR Snow back to its partner China Resource Enterprises.
Analysts say that selling the MillerCoors stake could raise USD 9 billion, while the CR Snow stake could raise about USD 4 billion.
Less clear are AB-InBev’s intentions in Africa, where SABMiller work closely together with France’s Castel Group, which is private. The Castel beer business, in which SAB have a 20 percent stake, already contributes a sizeable share to SABMiller’s profits in the region. Many analysts are curious how Mr Castel will view a change of partner and culture. As rumours have been plentiful of the octogenarian Mr Castel eventually selling out, we suppose that Jorge Lemann, the multi-billionaire shareholder of AB-InBev, should not find it too difficult to persuade Mr Castel (both are Swiss residents and both made their fortunes in their lifetimes) to accept a big put-option, which would give Mr Castel the right to sell out to AB-InBev at some point.
This leaves us with only one question mark: what will become of SABMiller’s 24 percent stake in the Turkish Efes Group, which SABMiller obtained in 2012 following the transfer of their Russian and Ukrainian beer businesses to Efes? If AB-InBev and Efes were to combine their businesses in Russia, that would give them a 28 percent beer market share and perhaps more of a lever to compete against Carlsberg-owned Baltika. However, the Russian beer market has been in decline for years both in terms of volumes and brewers’ profits and the future does not bode well either. Therefore, if Efes were to buy back SABMiller’s stake and perhaps even take over AB-InBev’s eastern European assets, AB-InBev should not be too upset.
As said, at this stage, the AB-InBev-SABMiller deal is merely rumour, albeit a loud one. Also, we have no genuine insight into how the deal, should it ever come about, will be structured in detail. All the above is merely our conjecture.
But if it does happen, it will underline two things: that big money is just about big money and that beer in all this merely figures, well, as an underlying product.
On a final note, once SABMiller will be gone, the beer monopoly will be well and truly over.
