+------------------------------------------------------------------------------+
AB InBev as King of Deals Builds Case for SABMiller: Real M&A
2014-03-03 00:00:01.1 GMT
(For a Real M&A column news alert: SALT REALMNA <GO>.)
By Clementine Fletcher and Tara Lachapelle
March 3 (Bloomberg) -- Slowing growth at Anheuser-Busch
InBev NV and a dearth of big takeover targets may finally drive
the world’s biggest brewer to swallow its $79 billion rival,
SABMiller Plc.
After AB InBev boosted revenue more than fivefold in the
last 10 years with the help of $91 billion of acquisitions,
growth for the maker of Budweiser and Stella Artois is forecast
to slow over the next decade, according to analysts’ estimates
compiled by Bloomberg. Tapping into SABMiller’s presence in
faster-expanding regions such as Africa would allow AB InBev to
get that growth flowing again, shareholders Alpine Woods Capital
Investors LLC and Henderson Global Investors said.
SABMiller Chief Executive Officer Alan Clark told Bloomberg
News in January that the case could be made for a tie-up, even
though it would likely require divesting some U.S. operations to
appease regulators. Sanford C. Bernstein & Co., which dubbed an
AB InBev-SABMiller combination “MegaBrew,” estimates it would
have almost half the global beer profit pool. The deal would
increase earnings at AB InBev immediately if it paid a 30
percent premium for SABMiller in cash, data compiled by
Bloomberg show. Cost cuts could drive profit even higher.
“It’s such an obvious next -- and indeed last -- big move
by the very acquisitive AB InBev,” said Matthew Beesley, head
of global equities at London-based Henderson Global Investors,
which oversees $125 billion, including shares of AB InBev.
“There’s also clearly some strategic rationale to the deal,
neatly filling all the geographic holes AB InBev talks of
wanting to fill.”
Workable Deal
A representative for Leuven, Belgium-based AB InBev
declined to comment on whether the company is interested in
pursuing a deal with SABMiller.
“You could get the numbers to work,” SABMiller CEO Clark
told Bloomberg News in an interview during the Beer Summit in
Scottsdale, Arizona, in January. “There would be value loss and
value destruction because they’d know that they’d have to sell
the U.S. though.”
He declined to say whether there have been any discussions
or how likely such a deal may be. Richard Farnsworth, a
spokesman for London-based SABMiller, also declined to comment.
AB InBev and SABMiller were built into the No. 1 and No. 2
brewers through a series of acquisitions. InBev NV bought
Anheuser-Busch Cos. in 2008 for about $61 billion including net
debt, the largest deal in beer history. SABMiller acquired
almost 50 companies in the last decade, including Foster’s Group
Ltd. for about $13 billion in 2011, according to data compiled
by Bloomberg.
Sales Trends
AB InBev’s market value at the end of last week was the
equivalent of $169 billion, and SABMiller’s was about half that.
In 2013, AB InBev earned about 80 percent of its normalized
earnings before interest, taxes, depreciation and amortization
from the U.S., Canada, Brazil and Mexico, the company said last
week. Normalized Ebitda excludes non-recurring income or
expenses.
Like competitor MillerCoors LLC, the U.S. joint venture
between SABMiller and Molson Coors Brewing Co., AB InBev has
been battling sluggish sales of mainstream brands in the U.S.
amid economic pressures and a shift in consumer preferences
toward craft beers, spirits and wine.
AB InBev’s compound annual sales growth rate in the last 10
years was about 18 percent, according to data compiled by
Bloomberg. Analysts estimate it will slow to about 4 percent
over the next 10 years, the data show.
Branching Out
An acquisition of SABMiller would give AB InBev more than
$7 billion of revenue in Africa with brands including Castle and
almost $4 billion of sales in Asia, reducing AB InBev’s
dependence on the Americas and Brazil, data compiled by
Bloomberg show. With Latin America representing SABMiller’s
biggest market, a deal would also broaden AB InBev’s presence in
countries such as Colombia, Ecuador and Peru. Its Latin American
brands include Cristal and Aguila.
“SAB has a lot of emerging-market assets, and in
particular, in areas where AB InBev doesn’t necessarily have too
much influence,” Bryan Keane, a money manager at Alpine Woods,
said in a phone interview. “Right now, AB InBev does not have a
lot of business in Africa and SAB is a large player there.
That’s one of the areas where beer consumption is growing, and
it would allow AB InBev to further diversify the business.”
Purchase, New York-based Alpine Woods owns AB InBev stock
among the $4.5 billion of assets it oversees.
‘Incredible Undertaking’
While AB InBev and SABMiller operate in largely separate
markets, antitrust authorities probably would require SABMiller
to sell its stake in MillerCoors and possibly its stake in a
Chinese joint venture, according to Jonathan Fyfe, an analyst at
Mirabaud in London.
SABMiller also has pre-existing sales agreements globally
that may have to be renegotiated, such as its joint venture with
Groupe Castel in Africa, Fyfe said in a phone interview.
“It’d be an incredible undertaking,” he said.
Even so, investors have cheered the prospect of a merger in
the past. A report by Brazilian news website IG in October 2011
that said the two companies were in deal talks triggered the
biggest gain in SABMiller shares in three years.
SABMiller’s stock price has been weighed down this year,
falling 5.6 percent through last week, amid concern that growth
in developing markets won’t be as strong as expected and
headwinds from currencies including the South African rand and
Colombian peso.
Earnings Bump
Any offer to create “MegaBrew” now could reach about $120
billion, including SABMiller’s $16 billion of net debt, said
Trevor Stirling, an analyst at Sanford C. Bernstein in London.
That translates to about a 30 percent premium to its stock price
last week.
At that price, earnings per share could climb by about 3
percent this year and 9 percent in 2015, according to data
compiled by Bloomberg. Even at a 50 percent premium, a deal now
would boost earnings in 2015, the data show. That’s without
assuming potential synergies.
“Whereas a deal has been strategically sensible, for a
while, it’s been financially impossible,” said Beesley of
Henderson Global. “We are now in the financially possible zone,
although maybe not quite yet the financially optimal zone.”
AB InBev could probably strip out costs and improve
profitability after the transaction closes, though there’s less
“low-hanging fruit” than in previous deals such as Anheuser-
Busch, said Stirling of Sanford C. Bernstein.
Given the size of the transaction, it would be “a stretch,
and massively complex,” though still feasible, he said.
Acquisition Opportunities
AB InBev already has $39 billion of net debt, which is 2.3
times its trailing 12-month earnings before interest, taxes,
depreciation and amortization, data compiled by Bloomberg show.
Felipe Dutra, the company’s chief financial officer, said last
week that after it pays down debt and reduces its leverage ratio
to 2, “you should expect us to be combining a dividend and
buyback to keep capital structure around the optimum level,
provided there is no M&A, which we can never predict.”
Acquisitions remain “a core competency, and we will always
be ready to look at opportunities when and if they arise,”
Dutra said.
While a deal may not happen immediately, it’s possible in
three to five years as beer makers such as AB InBev look for
ways to continue growing, Keane of Alpine Woods said.
“For the most part, the global beer market is not a high-
growth business,” he said. You have pockets of strength, which
is more on the emerging markets side of the world. But if these
businesses are looking for growth, consolidation is one way they
can do it.’’
For Related News and Information:
AB InBev Sees Improving Beer Market Trends in U.S., Brazil
NSN N1LT0J6VDKHX <GO>
Light Beer Brands Victims of Big Brewer Push Into Craft: Retail
NSN MZV0BF6VDKHW <GO>
Slower Earnings Growth May Accelerate Beverage M&A, Nomura Says
NSN MZHERD6TTDS5 <GO>
Merger Calculator: MRGC <GO>
Bloomberg Industries - Beverages: BI BEVG <GO>
Real M&A columns: NI REALMNA <GO>
Bloomberg Industries, beverages: BI BEVG <GO>
--With assistance from Duane D. Stanford in Atlanta. Editors:
Beth Williams, Whitney Kisling
To contact the reporters on this story:
Clementine Fletcher in London at +44-20-7330-7285 or
cfletcher5@bloomberg.net;
Tara Lachapelle in New York at +1-212-617-8911 or
tlachapelle@bloomberg.net
To contact the editors responsible for this story:
Beth Williams at +1-212-617-2307 or
bewilliams@bloomberg.net;
Celeste Perri at +31-20-589-8505 or
cperri@bloomberg.net