New rumour that SABMiller will merge with Diageo
SABMiller’s share price has climbed in recent weeks on the rumour that the world’s number one brewer AB-InBev will take it over. Now speculation has been growing that, in order to prevent this from happening, SABMiller, the world’s number two brewer, is planning to merge with the number one drinks company Diageo.
If true, this would not only create a new giant in the Total Beverage Alcohol (TBA) category with a combined turnover of USD 34.4 billion (compared with AB-InBev’s USD 43.2 billion), it would also give SABMiller access to the Guinness beer business and create synergies from using SABMiller’s global beer distribution network. Cost savings, though (as in an AB-InBev-SABMiller deal), would be almost negligible. Analysts put them at perhaps GBP 430 million (USD 740 million).
Many readers will be having a sense of déjà vu. Did not the old Anheuser-Busch back in 2008 attempt to strike a deal with Mexico’s brewer Modelo in a desperate bid stop InBev in their tracks? As we all know, nothing came of that. In the end, Anheuser-Busch was sold to InBev and AB-InBev was created.
That’s why many sober observers say that the latest speculation that SABMiller could patch up with Diageo is merely froth to fill pages of newsprint and fuel market speculation.
Because the real issue has been – and still is: What will SABMiller’s major shareholders – cigarette company Altria and the Colombian Santo Domingo family who control 41 percent – get out of a tie-up with Diageo that they would not get from a deal with AB-InBev?
Altria’s sole interest in SABMiller has been a nice and steady stream of dividends. This is needed to keep Altria’s shareholders happy. Take it for granted that Altria’s people are looking ahead and would only be persuaded to choose Diageo over AB-InBev if their future dividends would be seriously enhanced.
Of course, there are some arguments which would speak in favour of a SABMiller-Diageo merger: the majority of analysts expect the global beer market to grow at a slower pace than the spirits market for the next few years, which might make Altria more inclined towards Diageo.
However, “Diageo’s business has stalled over the last year and pressure on management to address investor concerns around slowing top-line growth rates is building,” said Barclays Bank. It was reported that Diageo’s beer sales (eg Guinness), which contribute about 20 percent to Diageo’s EBIT, are slowing, especially in Africa.
Unless SABMiller and Diageo are keen on feeding their bankers, all the arguments cited above make a combination of SABMiller and Diageo appear like they both desperately need it because they are in a bit of a funk when it comes to their long-term growth prospects.
Incidentally, the MotleyFool.com website ran an interesting piece on 26 June 2014 which looked at how dividends are financed at Diageo and SABMiller. The article said that when digging deeper into the cash flow statements of Diageo and SABMiller, “it becomes apparent that both companies rely on debt, and lots of it, to support their dividend policies.” But is this a problem? Apparently not. Both companies can raise more funds in a flash at a very low rate. Nevertheless, it’s a point worth bearing in mind.
Whichever rumour will pop up in the weeks to come, readers should always remember that Altria and the Santo Domingos hold the key in all this: what have Diageo to offer them that is better than what AB-InBev can offer? To us, the crux of the matter is: who has the better long-term strategies and not just short-term gains from a deal?
