SABMiller and InBev: The dance of the elephants

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Rumours have been circulating for over a year now that Anheuser-Busch InBev (ABI), the world’s largest brewer would like to acquire SABMiller, the second largest global brewer. If such a deal were ever to be consummated, it would create one of the world’s largest consumer companies, ranking in size with Procter & Gamble and Unilever. However, we believe that such a deal is far off in the distance, if at all, for a variety of reasons which will be explained in greater detail in this note.

The world’s brewers have been consolidating at a phenomenal rate in the past ten to fifteen years, to the extent that only a small handful of them control the majority of beer brewed in the world today. The top four-ABI, SABMiller, Heineken and Carlsberg-collectively accounted for 49.9% of total global beer production in 2010.

But the very large deals, such as SAB’s acquisitions of Miller in 2002 and Bavaria in 2006 and Interbrew’s merger with Ambev in 2003 which formed InBev and Inbev’s acquisition of Anheuser-Busch in 2008 are largely a thing of the past. This is so because there are no medium to large brewers left to acquire, which leaves just the three global brewing giants-ABI, Heineken and SABMiller-dancing with themselves. Fosters of Australia, recently bought by SABMiller for $10bn, is only ranked number 30 in the global beer volume league.

So it is becoming increasingly difficult for the beer behemoths to make any appreciable difference to performance by acquisition – other than by making audacious acquisitions, such as that envisaged in an ABI/SABMiller deal.

Talks between SABMiller and ABI or its predecessor are not new; in 2007 the two groups held talks with a view to merging (this was before the acquisition of Anheuser-Busch by InBev when Inbev was appreciably smaller than it is today and in fact was smaller than SABMiller at the time). But InBev was not prepared to pay the premium required by SABMiller’s shareholders and so the deal fell through.

Currently, there has been no confirmation that any talks have taken place in recent times. Indeed, under London Stock Exchange rules, SABMiller would be obliged to notify the takeover authorities of such talks if they were deemed to be price-sensitive. The deafening silence from SABMiller suggests an absence of any talks.

At a purely superficial level, it is easy to see why such a mega-deal makes sense. While the two companies have largely grown by acquisition in the past twenty years or so, there has been remarkably little geographical overlap between them. If such a deal were to occur, regulatory approval in the different geographies in which they operate would hardly be an issue, with the notable exceptions of the US and China. In both of these jurisdictions, it is likely that the combined group would be forced to dispose of the SABMiller assets (Miller-Coors in the US and CR Snow in China), probably at a heavy discount to net asset value.

But there are other reasons why such a mega-deal just doesn’t make sense and why we do not believe it will happen, at least not in the foreseeable future.

Take Castel, for example, in which SABMiller holds a 20% stake. This is the company’s joint venture partner in the rapidly growing African beer market (outside of South Africa) and SABMiller has a pre-emptive right to make a bid for Castel in the event of that company ever wishing to sell. In the event of a change of control of SABMiller, it is not clear whether or not that pre-emptive right would remain and thus potential value could be lost in a an ABI-SABMiller merger.

If SABMiller were acquired by ABI at a 30% premium to the current share price, executive management share options that vested automatically on such a deal being consummated would be worth around $1bn. It is unlikely that these executives would be inclined to stay with the combined entity and even if they did, their incentivisation levels would surely decline appreciably.

But the main reason why we don’t believe that ABI will be making overtures to SABMiller (at least in the short to medium term) is the numbers just don’t make sense at this point in time. ABI only recently digested its 2008 acquisition of Anheuser-Busch and still has a lot of debt relating to that deal. To fund an $80bn or $85bn acquisition of SABMiller using debt would stretch its balance sheet to unacceptable levels. And while InBev was able to take on a huge amount of new debt to finance the Anheuser-Busch acquisition in 2008 that was not problematic, as Anheuser-Busch’s cash flows were almost entirely denominated in US dollars. SABMiller’s cash flows, on the other hand, are mainly derived from Colombian pesos and South African rands, which are more difficult to gear up in international debt markets.

The bottom line is that a deal between ABI and SABMiller appears unlikely in the foreseeable future, though we don’t discount it completely in the longer term. In the meantime, we are very happy with our SABMiller holding in our model portfolio.

*Chris Gilmour is an Analyst at Absa Asset Management Private Clients