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SABMiller – Out to get ’em

Hot on the heels of its successful bid for Australian brewer Fosters, SABMiller has clinched a deal with Turkey’s largest brewer, Anadolu Efes (Efes), earning it a standing ovation from analysts.

Hot on the heels of its successful bid for Australian brewer Fosters, SABMiller has clinched a deal with Turkey’s largest brewer, Anadolu Efes (Efes), earning it a standing ovation from analysts.

“It’s a mastermind stroke,” says Rob Forsyth, head of industrial research at Investec Asset Management. “It’s brilliant,” says Absa Asset Management analyst Christopher Gilmour. The deal ties up one of the largest remaining independent emerging-market brewers.

Under the deal SABMiller will transfer its Russian and Ukrainian businesses to Efes in exchange for a 24,3% stake in the enlarged group. It also gains the first refusal right on Efes shares sold by its controlling shareholders, the Yazici and Ozilhan families.

Forsyth says merging Efes’ and SABMiller’s units in Russia comes at a time when the country’s beer market, the world’s fourth-biggest, faces uncertainty created by the Russian government’s move to curb alcohol consumption.

Taxes on beer have tripled and further measures, including a ban on beer sales at airports and outdoor kiosks, are planned for 2013.

This makes the critical- mass benefits realised by combining SABMiller’s 7% market share and Efes’ 11% share all the greater . The merger creates Russia’s second-biggest brewer, which UK-based Barclays Capital notes will be positioned to compete “head on” against the country’s largest brewer, Carlsberg, which has 38% of the market .

The merger also puts Heineken, with its 12% market share in Russia, at risk of marginalisation, says Barclays Capital.

The merger should bring cost savings which SABMiller puts at “at least” US$120m/year. Bernstein Research analyst Trevor Sterling estimates that, with cost savings , Efes’ latest earnings before interest, tax and amortisation (Ebitda) will be US$595m.

SABMiller’s share of this will be about $144m, compared with the Ebitda of about $100m he estimates SABMiller made from its Russian and Ukrainian units in its year to March 2011.

The boost to SABMiller’s profit is a bonus. The big prize is its strategic relationship with Efes, the world’s 11th-largest brewer based on its production of 24,2mhl of beer in 2010, according to research firm Plato Logic. By comparison, Fosters’ 9,3mhl production ranked it 30th.

Efes brings with it an 89% share of Turkey’s developing beer market, which , reports Plato Logic, recorded annual per capita consumption of 12,6l in 2010, less than half the 27l world average. Efes is also the leading player in Georgia, Kazakhstan and Moldova.

The Efes deal enhances SABMiller’s appeal as a company, combining strong defensive characteristics and a strategy geared towards dynamic growth. Though the brewer’s latest trading statement indicates that it is under pressure in some markets, it is still on track to deliver solid growth in its year to March 2012.

SABMiller reports weak market conditions in Europe, North America and the low profit margin Asia region. This weakness was largely offset by strong growth in high-margin Latin American markets and, with the exception of SA, Africa. Overall, SABMiller reported beer volume up 3% and revenues up 6%.

Based on the consensus forecast of analysts polled by I-Net, SABMiller will report a 47% increase in EPS in the year to March 2012, followed by average growth of just under 21%/year in the next two years. The big jump in the current year comes from the rand’s depreciation. Looked at in UK sterling terms, Sterling expects a 12% rise in EPS in 2011/2012 and EPS growth to average 15,4%/year over five years.

For investors looking for a share that will deliver above-average earnings and dividend growth and provide a strong hedge against rand weakness, SABMiller is a first-class choice.

3 Nov. 2011

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