CARLOS Brito, CEO of the world’s largest brewer, Anheuser-Busch InBev (AB InBev) makes no secret of his goal of global beer market domination. It makes SABMiller, AB InBev’s closest rival, a prime target for Brito, who has masterminded acquisitions totalling US$91bn in his 10 years as CEO.
A move by AB InBev on SABMiller is inevitable but probably three to five years away, says Christopher Gilmour of Absa Asset Management. Others believe it could come far sooner.
"There is a 50% chance of it happening before the end of 2015," Robert Ottenstein, senior MD and head of global beverage research at Boston, US, securities firm International Strategy & Investment, told Investors Monthly in a written response. "More than at any point in the past 10 years, SABMiller appears ripe for a combination with AB InBev," Ottenstein said.
Since 2010 market speculation has ebbed and flowed on an imminent bid for SABMiller by AB InBev. In June it sent SABMiller’s share price spiking to almost $59 (R627). "The market was pricing in up to a 60% chance of a bid," says Izak Swanepoel, an analyst at Old Mutual Investment Group’s Electus boutique. Having subsequently eased back to around $50, SABMiller’s share price is now pricing in a 20%-30% chance of a bid, he says.
For AB InBev an acquisition of SABMiller would add huge scale, taking its share of global beer profits from 32% to about 45%, says Gilmour. SABMiller would also bring much-needed diversification, particularly into emerging markets, which account for upwards of 70% of its earnings before interest, tax, depreciation and amortisation (Ebitda).
AB InBev is heavily dependent on the mature North American beer market it entered in 2008 through its acquisition of Anheuser-Busch for $52bn, the biggest yet beer industry deal. North America, where the beer giant’s market share is over 45%, accounted for 42% of its Ebitda in 2013. But growth prospects are poor with a steady consumer shift to wine and spirits eroding beer volumes by up to 3% a year.
The primary focus of AB InBev’s emerging market drive has been south of the US border. In Mexico it generates 11% of Ebitda and has a 58% market share. In Latin America it is even stronger, holding a 68% share of Brazil’s beer market and 79% of Argentina’s. The two countries account for 30% of group Ebitda. Any further Latin American ambitions AB InBev may have would be well served by SABMiller, which has a market share of well over 90% in Colombia, Peru and Ecuador.
But the biggest emerging market prize SABMiller would bring is Africa, where AB InBev has virtually no exposure. Sanford C Bernstein analyst Trevor Stirling sums up Africa as "probably the most attractive region for long-term profit growth for global brewers".
SABMiller would bring brewing operations in 17 African countries including South Africa, a 34% market share by volume and Ebitda of $2bn. Excluding South Africa, SABMiller grew African beer volume 6% in its year to March 2014 in a global market where growth was negligible.
Another attraction is SABMiller’s alliance with family-controlled French liquor group Castel, which operates breweries in a further 22 African countries and has a 22% market share by volume. The alliance, market leader in 30 of the 39 countries it spans, is secured by SABMiller’s 20% stake in Castel’s African operations and Castel’s 38% stake in SABMiller’s African operations, excluding South Africa.
If AB InBev were to launch a bid for SABMiller it would not come cheap, particularly if it is to get SABMiller’s key shareholders on board and ensure 51% in favour needed to secure the deal.
The largest stake in SABMiller, 26.8%, is owned by US group Altria (formerly Philip Morris) and was acquired when it sold Miller Brewing to SA Breweries in 2002. The second-largest stake, 14.2%, has been held by the Colombian Santo Domingo family since its sale of South American brewer Bavaria to SABMiller in 2005. In distant third position is South Africa’s Public Investment Corp with 4.5%.
Ottenstein puts a figure of $116bn on a combined share and cash deal including SABMiller’s $13bn debt. Stirling looks to a figure upwards of $120bn. Either way, a deal at these levels would represent a hefty premium to SABMiller’s market cap of $80bn.
A deal this size would also be the third-largest acquisition yet, the largest since 2000 and set a new beer industry record. But it would face some complexities.
SABMiller has been quiet on a potential bid from AB InBev. The closest it has come to a comment was CEO Alan Clark’s response to a question from Bloomberg in January. "You could get the numbers to work," said Clark. "[But] there would be value loss and value destruction." He was referring to the overlap between the two brewers in the US where SABMiller has a one-third market share through MillerCoors, its 58%-owned joint venture with Molson Coors.
A combined market share of 80% of the US market would hit insurmountable competition problems, forcing the sale of MillerCoors, though this is not a problem. "It would be snapped up by Molson Coors," says Gilmour.
Another potential overlap is in China where SABMiller, through a 49% stake in China’s largest brewer, CR Snow has a 23% market share and AB InBev a share of 14%. Whether the combined market share would be approved by competition authorities is uncertain. Outcomes are "unpredictable", notes UK law firm Slaughter & May.
Despite the challenges AB InBev would face in an acquisition of SABMiller, Ottenstein believes it would be a "win-win-win" deal for all players. In his assessment he makes conservative assumptions, including the sale of SABMiller’s stake in CR Snow.
For SABMiller shareholders opting for AB In Bev shares, Ottenstein points to a big dividend uplift reflected in SABMiller’s 1.9% dividend yield and AB InBev 3.7%, which he believes will not be affected by a deal. The merger will also produce significant earnings-enhancing cost synergies for AB InBev, which he estimates at $3bn in the first three years after a deal.
A big concern is the void the disappearance of SABMiller from the JSE would leave. Rob Forsyth, Investec Asset Management industrial sector research head, believes concern is unwarranted, with the most likely outcome a dual listing of AB InBev on the JSE. "Most South African shareholders would not want cash," says Forsyth.
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