SABMiller/AB InBev: Aligned conditions may have aided approach - bankers
* Pepsi and Coca-Cola bottling partnerships may pose problems
* JV Partners, major peers seen as potential divestment buyers
* Big cash consideration could help against SAB defence moves
A number of developments in the beer industry have helped align the stars for AB InBev [EBR:ABI] to finally make an approach to SABMiller [LON:SAB], sector bankers and SAB investors said.
Low debt costs, a slowdown in mainstream Western beer markets and existence of potential buyers for divestments could aid deal talks.
It was confirmed on Wednesday by both companies that AB InBev intends to submit a proposal to acquire SABMiller.
Key hurdles to a deal include ABI having to manage its bottling partnership with Pepsi [NYSE:PEP] against SABMiller’s partnership with Coca-Cola [NYSE:KO]; finding a way for 27% SAB owner Altria to sell out without triggering tax implications; and antitrust risk mainly in China and North America, bankers said.
Analysts have suggested a deal could be done with a 40/60 stock/cash split, according to reports. This would allow SAB investors to benefit from cost cutting measures and deal synergies, a minority SAB investor said. However, this investor said they would likely sell their stock in the combined company once synergies were fully realised.
But, ABI historically has not shied away from using as much cash as possible for an offer, the first sector banker said. A cash offer would provide shareholders a welcome way to exit the stock in the face of a slowdown in mature beer drinking markets and a toughening outlook for organic growth, a second minority SAB investor said.
A majority cash offer might also help make it difficult for SAB to look for a merger with Diageo [LON:DGE] or Heineken [AMS:HEIA] as alternatives to ABI’s approach, the second banker said. “My guess would be they will put up as much cash as possible,” the first banker said. Raising funds from its lending syndicate should not be a difficult task, he said. Low borrowing costs seems like a key deal driver, the second banker said.
SABMiller’s two major investors own about 40% of the company. Behind Altria, Columbia’s Santo Domingo Group has an approximate 14% stake. The views of these shareholders are considered key for negotiations.
SABMiller director Alejandro Santo Domingo Davila is no stranger to the AB InBev circle, the second banker said. He noted Santo Domingo and AB InBev’s Alexandre Van Damme were both on the board of D.E. Master Blenders. Santo Domingo may be happy to roll his SAB investment over into ABI via a stock component, he speculated.
For Altria to exit, it might first require other investment opportunities to be lined up, the first banker said. On its website, Altria notes earnings from its SAB stake have grown at a compound annual growth rate of 10.9% from USD 600m in 2009 to over USD 1bn in 2014. It may wish to stay in the newco, the banker suggested.
Despite synergies and cost cutting opportunities on offer, minority investors might want clarity on organic growth potential if there is a large share component, the second minority shareholder said. The deal would mean ABI would no longer be able to expand inorganically in beer, he noted.
An interesting dynamic is activist investor Nelson Peltz’s earlier calls for PepsiCo to be split along soft drink and snack lines, the first banker said. Following SAB, the next move for ABI would have to be in non-beer drinks, meaning the soft drink arm of Pepsi could be an attractive target, he said. ABI has a bottling contract with Pepsi that can expire at the end of 2017, given two years’ notice is provided.
ABI’s relationship with Pepsi and SAB’s relationship with Coca-Cola are key factors that will need work in deal negotiations, the first banker said. Unwinding one or the other could be a complex operation.
In 2014 SAB combined its coke bottling operations in Africa with Coca-Cola. SAB owns 57% of Coca-Cola Beverages Africa alongside Gutsche Family Investments (31.7%) and The Coca-Cola Company (11.3%). One option would be for Coca-Cola to buy SAB’s holding, the first banker said.
In its annual report, SABMiller notes a change of control would give Coca-Cola certain rights under its bottling agreements with various subsidiaries of the company. It also notes the same in certain circumstances for joint ventures in China, with China Resources Enterprise; in the US with Molson Coors [NYSE:TAP], and in Turkey where it has minority protection rights for its 24% in Anadolu Efes [IST:AEFES].
China Resources and Molson Coors would be the front-runners to buy SAB’s stakes in their respective JVs, the bankers said. Otherwise, large sector peers would likely be interested, they said.
Heineken in particular may be interested in SABMillers 58% rights in MillerCoors, the second banker said. Carlsberg [CPH:CARL] could show interest as a way of breaking the US market, but is facing a series of problems including a cost-cutting programme and loss of key executives, he noted.
Japanese players Asahi [TYO:2502] and Kirin [TYO:2503] may also be interested in the MillerCoors stake, as well as the 49% stake in China Resources Snow Breweries, the first banker said.
Meanwhile SAB’s relationship with Groupe Castel in Africa might not be as big a hurdle to overcome, the bankers said. Castel owns 38% of the majority of SABMiller’s African operations, which was exchanged for a 20% stake in the French drinks company. ABI would primarily just need to tread carefully in not altering the close relationship Castel has with SAB, the second banker said.
Both SAB and ABI declined to comment.