The brewing industry has racked up $142bn worth of deals in the past five years, according to Bloomberg, but some analysts say the “big one” has yet to come.
That crowning deal would see Anheuser-Busch InBev acquire SABMiller, for about $70bn before divestments, trumping InBev’s $52bn acquisition of Anheuser-Busch, which created the world’s biggest brewer.
It would result in a company controlling roughly a third of the global beer market, before disposals.
“An acquisition of SABMiller, combining the two leading industry players, which we have long seen as the logical endgame for ABI, now looks to be feasible,” writes Eddy Hargreaves of Collins Stewart in a report examining the probability of a deal.
For Credit Suisse, a “deleveraging ABI, an increasingly disadvantaged SABMiller footprint and business rationality at both firms are ripe to produce more consolidation in the global beer industry”.
This view is reinforced by changes at the top at SABMiller, whose chief financial officer, Malcolm Wyman, is to retire in July and whose chief executive, Graham Mackay, is expected to follow in a year or two. Unsurprisingly, it is not a view shared by SABMiller.
The proudly independent company, with its South African roots and UK listing, sees itself as far from disadvantaged, with some 80 per cent of sales from fast-growing emerging markets and virtual strangleholds in countries such as Colombia.
Jonathan Fell, analyst at Deutsche Bank, rehearses the case against a merger.
“Putting two businesses together that have quite discrete geographical footprints does not necessarily create a lot of value,” he argues.
This is “because branding in beer is still pretty local and because you cannot ship beer halfway across the world [given transport costs] except in niche circumstances.”
Based on this logic, some analysts have floated more inventive tie-ups, such as melding SABMiller with Diageo, the UK spirits maker whose brands include Johnnie Walker whisky and Guinness, or soft drinks maker PepsiCo.
However, Trevor Stirling, analyst at Bernstein, sees little to gain from these pairings. Distribution synergies are restricted to the very early-stage emerging markets, he says.
SABMiller’s options in the global beer market appear limited. It would dearly like to buy Castel, the African brewer with which it has a cross-shareholding, but the family owners have expressed no desire to sell.
Foster’s of Australia, effectively on the block after a separation of the wine and beer businesses, is an expensive asset in a mature market and a potential deal about which several SABMiller investors have expressed disdain.
In contrast, ABI faces fewer obstacles in any move to acquire SABMiller, Mr Hargreaves says.
“I think ABI could do it now pretty much, all for cash,” he says. “I really think it’s entirely conceivable they do it within a year, for a net $63bn outflow, including fees.”
In practice, he adds, an element of equity would likely be used too.
According to his numbers, such a deal would lift ABI’s net debt/earnings before interest, tax and depreciation from 2.8 times today to 4.3 times. This is below the 5.5 times multiple it hit after the Anheuser-Busch acquisition.
The calculation assumes disposals of businesses that may breach antitrust concerns.
ABI boasts proved ability to whittle out costs, extract synergies and run a leaner, more profitable operation.
But even it might find SABMiller a tougher challenge, Mr Stirling says.
“SABMiller is nowhere near as inefficient as Bud[weiser] was,” he says, pointing out that ABI was able to lift the latter’s operating margins by 13 percentage points. By comparison, the most it could hope to shave off SABMiller’s costs is 5 percentage points, he calculates, and that would be mainly from headquarters and procurement synergies.
Currency mismatch and execution risk also make it harder to forge a deal, he says.
“If ABI bought at ?28 a share, management would receive ?650m from options vested. If they receive that, they are going to walk into the sunset, not hang around, which would leave big holes in management.”
When could the moment of decision arrive?
“I think in a few years’ time ABI will reach a fork in the road,” Mr Fell says. “It either becomes a ginormous cash machine just handing back cash … or they could go and buy something massive, and SABMiller would be one of the things they could buy.”
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